Econ1007 Assignment 2 PDF

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Essay Assignment

Word count 1290

Question 1 In general, the fluctuation of share prices will reflect the economic conditions of an economy. Falling share prices indicates that the Australia economy is doing poorly, and share prices change because of supply and demand. If more people wanted to sell a stock than buy it, there would be greater supply than demand, therefore it would cause the price to fall. As stated in the article, the falling of share prices are due to the weak commodity prices and drop in Chinese equities which concerned the Australia economy because the real state of China’s economy will determine Australia’s outlook. Due to the collapse of commodity prices, it has reduced demand.1 As the graph shows, the reduction of demand have set up a new equilibrium from E0 to E1 due to less goods being exported. When goods are not being exported, it creates surplus which means the price will fall, therefore companies will be earning less profit and also reduce their share prices. As a result, the new equilibrium is needed to find the equilibrium price in the market where quantity of aggregate demand equals the quantity of aggregate supply. This is the point when the demand and supply curves in the market intersect. Falling share prices will also affect the employment in Australia because when companies are performing poorly and their profits are falling, they will cut jobs to reduce costs. This will leave many unemployed and if employment doesn’t grow faster than population, unemployment rate is likely to rise. When consumers are unemployed, there will be less consumption and businesses will lose revenue, therefore further job cuts. Government spending will be reduced because less tax will be collected and will slow down the economic growth in Australia.

1 Mulligan, M, 2015. ASX sell-off lifts chances of RBA interest rate cut in November. Available at:http://www.smh.com.au/business/the-economy/asx-selloff-lifts-chances-of-rba-interest-rate-cut-in-november-20150825gj6xa1.html [Accessed 11 October 2015].

Essay Assignment

Word count 1290

Question 2a The Reserve Bank would intervene and lower interest rates to financially stimulate the Australia economy in order to increase spending and investment which is necessary for economic growth. This method is called an economic stimulus which is the use of monetary policy to stimulate the struggling economy by ways of lowering interest rates, increasing government spending and quantitative easing.2 The Reserve Bank is responsible for Australia’s monetary policy.

The low interest rate is key in stimulating Australia’s economic growth. By lowering interest rates, it increases demand for consumption and investment which leads to higher demand for labor. As the graph above shows, before lowering interest rates, number of employments is at E0 but when interest rate falls from I0 to I1, it shifts to E1 which rises in employment. Low Interest rates make the cost of borrowing cheaper. This encourages firms to take out loans to finance their business expansion which will eventually decrease unemployment rate as businesses seeking to employ more people. When there are high employment rate, it encourages consumers to spend rather than hold onto money which increases consumption, helping to boost the economic growth. Decreasing interest rates cause a rise in AD, which will improve Australia’s real GPD but also increasing the inflation rate.3 However, the Reserve Bank is very aware of this and they would apply the monetary policy to fluctuate interest rates when it’s only necessary to slow down or stimulate the economy.

Question 2b 2 Investopedia. 2011. Economic Stimulus. [ONLINE] Available at:http://www.investopedia.com/terms/e/economic-stimulus.asp. [Accessed 11 October 15]. 3 Pettinger, T, 2013. Effect of lower interest rates [Online] Available at:http://www.economicshelp.org/blog/3417/interestrates/effect-of-lower-interest-rates/ [Accessed 11 October 2015]

Essay Assignment

Word count 1290

In the article, some economists believe that markets are over-reacting and therefore another cash rate cup isn’t necessary. Economists believe that the hit to Australia’s real economy from the drop in share values will be too small to warrant another reduction. China’s is the world biggest factory and it is slowing down which is why the markets are paying attention to the growth slowdown in China. But it doesn’t mean the Chinese economy is not still growing at resemble pace. China is Australia’s biggest trading partner and growth slowdown in China would affect Australia because China is relying as heavily on the commodity exports Australia specialized in and that caused the markets to overreact. In addition, China’s shock move to devalue the yaun is sparking fears over the country’s growth outlook.4 By lowering their currency, China is just trying to boost its export sector to be a dominant exporter. China is most likely to lift its economy as authorities continue to roll out stimulus.5 Furthermore, China can’t keep their currency low continually, as it means they will have to pay more for their imports because they also heavily depend on resources from overseas such as Australia mining. The markets are panicking because devaluation of the yaun will make Aussie commodities exports more expensive and therefore Chinese demand for commodities will slowdown. These economists believe that the Reserve bank should leave the cash rate unchanged because it is an overreaction of the slowdown of China’s economy and the effect that it will have on Australian exports and employment. They believe that share markets have overreacted and the situation will not affect consumer spending and investment dramatically. In addition, the falling Australia dollar will likely to save the Reserve Bank from cutting cash rate and therefore another cash rate cut is not necessary.

Question 3

4 Saunders, A, 2015. Commodity markets overreacting to falling yuan, says UBS. Available at:http://www.smh.com.au/business/mining-and-resources/commodity-markets-overreacting-to-falling-yuan-says-ubs20150812-gixlmm.html [Accessed 11 October 2015].

5 The Australia Business Review. 2015. RBA unlikely to cut cash rate again. [ONLINE] Available at:http://www.businessspectator.com.au/news/2015/10/2/australian-news/rba-unlikely-cut-cash-rate-again. [Accessed 11 October 15].

Essay Assignment

Word count 1290

China is the Australia’s biggest trading partner and Australia is the most affected if China’s economic slowdown due to that Australia exports a great deal to China. As Chinese demand for raw materials and commodities decline, there will be a knock-on effect in terms of their economic growth. For Australia, China accounts for around one-third of all exports.6 Since China is such a big trading partner for Australia (one-third of all exports), slowing down in China will dramatically affect the Australia economy and as well as other countries around the world, which therefore indicating the importance of China to the world economy. Undoubtedly, the real state of China’s economy will determine Australia’s outlook. Slowing down in China would cause many problems for the Australian economy in the medium and long term. Mining jobs will be threatened as Australia’s mining industry is very important for China. These implications would not only affect those working in the mining industry, but the entire country as economic growth will decline due to a drop in consumer spending because no job means less spending. Structural unemployment will decline. Unemployed equal less money for spending which means there is less demand in the economy. This shifts the aggregate demand curve to the left. The graph below shows the AD is shifting to AD1. Unemployment will reduce the supply of labor in the economy, therefore consumer spending will drop. This will create surplus in the economy which means businesses will cut more jobs, potentially increasing the number of unemployed even further. In the graph below, it shows aggregate supply shifting from AS to AS1 because price drop due to excess supply. The equilibrium output is also affected therefore shifting real GDP from Y to Y1 due to economic slowdown in China which is effecting Australia exports in raw materials and commodities forcing the AD to shift to the left. Overall, it seems that whatever happens to Chinese economy, it will greatly affect countries in the Asia-Pacific region such as Australia and should prepare to cope with likely serve impacts.

6 Yueh, L, 2015. How a Chinese slowdown will hit global growth. Available at: http://theconversation.com/how-a-chineseslowdown-will-hit-global-growth-46655 [Accessed 12 October 2015]....