Table of Contents 1 Introduction: Australian Economy 2 1.1 Real Gross Domestic Product 2 1.2 Inflation 2 1.3 Employment 3 1.4 Current Account 3 1.5 Exchange Rate 3 2 Monetary Policy 5 2.1 Objectives of Monetary Policies 6 2.2 Demand for Money 8 2.3 Supply of Money 10 2.4 Money Equilibrium 11 2.5 Effects of Money Supply (Demand) 11 2.6 Keynesians Vs Monetarists 12 3 Monetary Policy Framework 16 4 Monetary Policy Implementation 18 5 Open Market Operations 21 6 Fractional Reserves 23 References 25 1 Introduction: Australian Economy The Australian economy strengthened as 2001 progressed, in sharp contrast to the weakening seen in most of the rest of the world. Gross Domestic Product (GDP) grew by 4.2 percent through the year to the December quarter 2001. Unemployment remained low and signs of improvement were visible in the December quarter 2001, while ongoing inflation remained within the Reserve Bank of Australia's target range over 2001. (Asia-Pacific Economic Cooperation, 2002) 1.1 Real Gross Domestic Product Real GDP increased 2.6 percent in 2001 (in year average terms) following growth of 3.1 percent in 2000. The slowing in the rate of growth in the first half of 2001 reflected the abatement of transitory factors such as the Sydney Olympics stimulus and the introduction of The New Tax System (TNTS). In the second half of 2001 Australia's growth rebounded strongly, despite weakness in the world economy. Nonetheless, over 2001 Australia was one of the strongest developed economies. (Asia-Pacific Economic Cooperation, 2002) 1.2 Inflation The Australian Consumer Price Index (CPI) increased by 3.1 percent through the year to the December quarter 2001. Various one-off factors added to inflation over that period. The price of meat, seafood, fruit and vegetables increased substantially through the year. In addition, some price effects have resulted from the events of September 11, the collapse of a major Australian insurance firm (HIH) and the second largest Australian airline (Ansett). These upwards price movements were offset...
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FERTILIZER PRICING POLICY THE CURRENT FERTILIZER PRICING POLICY OF 2003-2004 PLUGS LOOPHOLES AS EXPLAINED BELOW: We did not expect the budget to take a bold measure like trying to increase the farm gate price of urea just a couple of years before the general elections-Unlike all expectations from the budget which was more from the revised retention pricing norms for manufacturers, the finance minister proposed an increase of Rs 240 per tonne in the farm gate prices of urea and Rs 200/ tonne for DAP and MOP. Complex fertilizer prices are to be altered to suit to the proportion of the NP mixes. This measure has been proposed to fill the expected gap in the subsidy costs of naphtha and gas feedstock. This is a much-needed measure but is not sure how the government will be able to overcome these implications on the social and political arenas. As this is a subsidy element and is a part of the budget finances, no impact is expected on any of the manufacturers of fertilizers. Considering the relative demand inelasticity of these products in a favorable monsoon environment, we are almost sure that there will no demand gaps, as a result of this measure. Rock Phosphate, Crude Sulphur and inputs for Phosphoric acid have also been exempted from Special Additional Duty (SAD) of customs for the sake of uniformity and this was a demand from the industry and a pricing anomaly as phosphoric acid is already exempted from SAD. Given the importance of fertilizer pricing and subsidization in the overall policy environment impinging on the growth and development of the fertilizer industry as well as well of agriculture, the need for streamlining these policies has been felt for a long time. A High Powered Fertilizer Pricing Policy Review Committee (HPC) was constituted to review the existing system of subsidization...
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WORKING PAPER SERIES Inflation Targeting: Why It Works and How To Make It Work Better William T. Gavin Working Paper 2003-027B http://research.stlouisfed.org/wp/2003/2003-027.pdf September 2003 Revised September 2003 FEDERAL RESERVE BANK OF ST. LOUIS Research Division 411 Locust Street St. Louis, MO 63102 ______________________________________________________________________________________ The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Photo courtesy of The Gateway Arch, St. Louis, MO. www.gatewayarch.com Inflation Targeting: Why It Works and How To Make It Work Better William T. Gavin Abstract Inflation targeting has worked so well because it leads policymakers to debate, decide on, and communicate the inflation objective. In practice, this process has led the public to believe that the central bank has a long-term inflation objective. Inflation targeting has been successful, then, because the central bank decides on an objective and announces it, not because of a change in its day-to-day behavior in money markets or the way it reacts to news about unemployment or real GDP. By deciding on an inflation rate and announcing it, the central bank is providing information the public needs to concentrate expectations on a common trend. The central bank gains control indirectly by creating information that makes it more likely that people will price things in a way that is consistent with the central bank's goal. The way to improve inflation targeting is to be more explicit about the average inflation rate expected over all relevant horizons. Building a target path for the price level, growing at the desired inflation rate, is the best way to institutionalize a low-inflation environment. In a wide variety...
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The building of a United Europe is undoubtedly one of the greatest historical undertakings of the 20th century. It is a process grounded in the positive values with which our civilization identifies – the preservation of peace, economic and social progress, respect for the person and the predominance of right over might – and, over nearly 50 years for which the process has been under way, there have been some moments of crisis but also major successes. Six countries originally rallied to the concept of a united Europe; now there are fifteen, while more than ten others feel drawn to towards the ideal and have applied to join the European Union. The Birth of the European Monetary System The economic crisis of the 1970s led to the first plans for a single currency. The system of fixed exchange rates attached to the US dollar was abandoned. European leaders agreed to create a "currency rope", tying together European currencies. Maastricht Treaty In December of 1991 the 15 members of the European Union, meeting in the Dutch town of Maastricht, agreed to set up a single currency as part of a drive towards Economic and Monetary Union. There were strict criteria for joining, including targets for inflation, interest rates and budget deficits. A European Central Bank was established to set interest rates. Price stability was identified as the paramount goal of the European Central Bank's monetary policy. To Enter the Euro-zone, a country must satisfy Convergence Criteria that are the following: · Low inflation · Low long-term interest rates · Stable exchange rate · Small budget deficit (less than 3% of GDP) · National debt cannot exceed 60% of GDP The analysis of our case centers around the following questions: 1,Why did members of the EC create the European Monetary System (EMS)? The EMS was crated in 1979 to stabilize foreign exchange and counter...
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In the 1970's, first proposals for a single currency evolved but it was not until the Treaty of Maastricht in 1992 that the plan was actually drafted and signed establishing the framework and timetable for the EMU . The road to the EMU has been one of the most ambitious, complicated and important events of the 20th century and found its completion on January 1st 2002 as 11 countries converted their national money into one currency – the euro. An economic powerhouse with 300 million inhabitants and a GDP of 6.6 billion $ was created on par with the United States. The goal of a single market was achieved by eliminating the last administrative barrier to ensure the four fundamental freedoms – mobility of capital, goods, people and services. The introduction of a common monetary policy with the foundation of the ECB and a single currency had and "will have important consequences" for the business environment within the euro area. While only time will tell what the actual effects are, there have been alterations and benefits identified in the short time since the start of the EMU that indicate an economic revolution. Indeed, there are areas where the euro dramatically influenced and shaped the business environment, although the most significant of these are likely to take years to deploy as corporations, governments and markets adapt to EMU but "still, over time, the revolution will roll forward rapidly" . Price stability has been anchored in the treaty of Maastricht as the main objective of the single monetary policy. Alongside the tight budgetary control for member states, the ECB followed the German Bundesbank's conservative politics to achieve a downward convergence of the inflation rate in the euro zone over the last years (see Figure 1) – 2.2 % in 2002. The benefits of price...
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There are numerous reasons for introducing a common currency. For most EU countries today, the majority of international trade is with other EU members. The euro-zone will become an area of monetary stability in Europe. The new currency removes exchange rate risks from the internal market, cuts the costs of transactions and encourages firms to trade across national borders. It also forces EU states to adopt responsible economic policies that contain inflation and increase real living standards.Currency unions have collapsed in the past. There is no guarantee that EMU will be a success. Indeed the Euro may be a recipe for economic stagnation and higher structural unemployment if the European Central Bank pursues a deflationary monetary policy for Europe at odds with the needs of the domestic UK economy. It is quite possible that the monetary union will not be sustainable; countries that discover themselves to be in difficulty may cancel their membership and re-establish an independent currency and an inflationary monetary policy. The example of Ireland's departure from the sterling currency area suggests that leaving a currency union is beneficial, rather than joining one. In theory, a currency union can offer economic benefits – but only under fortunate circumstances. The lack of exchange rates removes a very effective mechanism for adjusting imbalances between countries that can arise from differential shocks to their economies. History demonstrates that well-chosen devaluations can help an economy out of difficulties – the UK should retain this option. In a recession, a country can no longer stimulate its economy by devaluing its currency and increasing exports. The EMU is a step in a process that will cut Europe off from the rest of the world. It is bureaucratically motivated – a further advancement for European policy makers. Entry would mean a permanent transfer of domestic monetary autonomy to the European...
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Christopher Williams Economics Thursday, 21 November 2002 Q. Explain what is meant by monetary policy? (b) Discuss the monetary policy measures a government and/or central bank may take to stimulate economic activity. Monetary policy refers to the use of interest rates and the level of money supply to manage the economy. Monetary policy may be used to increase the level of economic activity (reflationary policies) or to decrease the level of economic activity (deflationary policies). A relationship therefore exists between monetary supply and the rate of interest. Economic theories have been suggested as to the extent of this relationship. Nevertheless, the monetary authorities may use various monetary policy measures to stimulate economic activity in the country. The Monetary authorities can establish either the level of money supply or the rate of interest, not both. If the demand for money (liquidity preference) does not change, any change in the supply for money will alter the interest rate. (Refer to monetary policy 1)The diagram supplied shows that an increase in the money supply from MS to MS1 will cause a fall in the interest rate from R to R1. Assuming the monetary authorities fixed the supply of money. A change (increase or decrease) in the demand for money (liquidity preference) will effect a change in the interest rate. The diagram supplied shows that a decrease in the demand for money (L to L1) will reduce the interest rate from R to R1. (Refer to monetary policy 2) Varying views exits as to whether manipulating the interest rate or money supply will easier stimulate economic activity. The Monetarists maintain that a change in the supply of money will have a direct and proportionate effect on interest rates. They believe due to the shape of the Long Run Aggregate Supply curve (LRAS), the price level can be altered but output...
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Fiscal Policy on GDP from Keynesian view Classical economic theory (Adam Smith, etc.) assumed that a "free-market" economy is a "self-regulating" system that continually tends towards full-employment equilibrium, with optimum economic benefits for everyone. Therefore, the best government economic policy is to "get out of the way" and give maximum freedom to individual enterprise. The term 'Classical' refers to work done by a group of economists in the 18th and 19th centuries. Much of this work was developing theories about the way markets and market economies work. Much of this work has subsequently been updated by modern economists and they are generally termed neo-classical economists, the word neo meaning 'new'. Classical economic believed that the government should not intervene to try to correct this as it would only make things worse and so the only way to encourage growth was to allow free trade and free markets. A key element of the "Keynesian revolution" was its demonstration that these basic assumptions are false, both in theory and practice, and its assertion that, the most appropriate government macro-economic policy is to view the whole economy as if it were a single huge business enterprise which needs to be managed as one. During the great depression John Maynard Keynes asked, "If supply creates its own demand, why are we having a worldwide depression? In view of this question he advocated massive government intervention to bring an end to the Great Depression. Fiscal Policy is when a national government makes decisions on taxation and spending with a view to influencing the level of production and employment. (Fiscal Policy and the Simple Keynesian Model, 2003)To many people, the Keynesian Revolution is often associated with the rationalization of active government macroeconomic policy. Indeed, one of the major appeals of Keynes's General Theory was precisely that it seemed to...
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Since its inception in 1913, The Federal Reserve, or as it is more popularly known as "the Fed," has played a very important role in the United States economy. (Colander, 2001, p. 333) For almost a century now, the Fed has impacted the way in which our economy operates, and the state it is in. Therefore, it is imperative that the views and opinions of the Federal Reserve are taken into consideration when evaluating current or future monetary policy. Through examination of its website, the Feds views on the state of the economy will be evaluated, along with its concerns on high inflation, the possibility of a recession, and its direction of recent monetary policy. The most recent Federal Reserve Monetary Policy Report, submitted to Congress on July 15, 2003, indicates that the state of the economy is improving and expanding, "the Committee judged that it would be prudent to add further support for economic expansion. The Federal Reserve expects economic activity to strengthen later this year and in 2004, in part because of the accommodative stance of monetary policy and the broad-based improvement in financial conditions" (www.federalreserve.com) Currently, the Federal Reserve is not very concerned with the possibility of a recession or high inflation. However, rather than being concerned about high inflation, the Fed is very concerned with a decline in the inflation rate. As stated in the previously mentioned report, "because of the considerable amount of economic slack prevailing and the economy's ability to expand without putting upward pressure on prices, the Committee indicated that the small chance of an unwelcome substantial decline in the inflation rate was likely to remain its predominant concern for the foreseeable future" (www.federalreserve.com). Furthermore, monetary policy is a pivotal economic policy used the most in macroeconomics, and is a pivotal function the Fed is responsible...
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The sub par performance of the U.S. economy extended into the first half of 2003. Although accommodative macroeconomic policies and continued robust productivity growth helped to sustain aggregate demand, businesses remained cautious about spending and hiring. All told, real gross domestic product continued to rise in the first half of the year but less quickly than the economy's productive capacity was increasing, and margins of slack in labor and product markets thereby widened further. As a result, underlying inflation remained low. (Fed Reserve Board, 2003) In financial markets, longer-term interest rates fell, on net, over the first half of the year as the decline in inflation and the subdued performance of the economy led market participants to conclude that short-term interest rates would be lower than previously anticipated. These lower interest rates helped to sustain a rally in equity prices that had begun in mid-March. The Federal Reserve expects economic activity to strengthen later this year and in 2004, in part because of the accommodative stance of monetary policy and the broad-based improvement in financial conditions. In addition, fiscal policy is likely to be stimulative as the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 go into effect and as defense spending continues to ramp up. Severe budgetary pressures are causing state and local governments to cut spending and to increase taxes and fees, but these actions should offset only a portion of the impetus from the federal sector. Moreover, the continued favorable performance of productivity growth should lift household and business incomes and thereby encourage capital spending. Given the ongoing gains in productivity and the existing margin of resource slack, aggregate demand could grow at a solid pace for some time before generating upward pressure on inflation. At the heart of the current debate over just how the Fed...
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