Australia Using Expansionary Monetary Policy

This article is about the Reserve Bank of Australia using expansionary monetary policy to cut interest rates as a way to achieve lower disinflation (inflation targeting) and stimulate economic growth. Disinflation refers to the slowdown in rate of increasing price level. Monetary policy includes policies governing the supply of money and interest rates in an economy. Economic growth, which can also be referred to as an increase in aggregate demand, is the rise in the total economic activity of an area over a given amount of time. One of the Macroeconomic objectives is high economic growth, and low and stable rate of inflation, to achieve this the Reserve Bank would lower interest rates because this increases economic growth while also raising

The reduction in interest rates also causes increased investment and decreasing incentive to save for firms. Net exports will be affected because the currency will inflate, making it cheaper for other countries to import Australia’s products, therefore other countries will buy more, increasing net exports. This problem of strong currency is talked about in the article, stating “the Aussie dollar has strengthened 5.4 per cent since the beginning of the year, denting the country’s tourism industry and boosting the price of its exports.” The Australian Reserve Bank is using inflation targeting, part of monetary policy attempting to keep inflation within desired limits. The article states that “(core inflation) is at 1.5 per cent, which was the lowest reading on record and below its target of between 2-3 per

Also, Reserve, or Central, banks are independent from the government and outside political influences, allowing them to make the best economic decisions for the country. Also net exports will increase with a lower interest rate. The limitations are that monetary policy depends on business and consumer confidence in the market and how willing these parties are to consume and invest. If the global economy is weak, a decrease in interest rates may not have as significant of an effect.In this case, they will most likely save rather than consume. Another limitation is that monetary policy works in the medium run, sometimes taking 2-3 years before effects can be seen. The main alternative to monetary policy is fiscal policy. Fiscal policy determines how the government earns money through taxation and how the government spends that money. The advantages of fiscal compared to monetary policy is that fiscal is much more targeted and specific compared to monetary, where some regions of the country may not benefit from stimulus, but others may. One limitation of fiscal policy is that governments have a set supply of money and therefore cannot spend more than they take in unless the government wants to create a budget deficit. The article also talks about the new government budget which incorporates fiscal policy: “the budget