[Coursera] Understanding the Australian Economy : An introduction to macroeconomic and financial policies.

Week 1. The Australian economy in an nutshell

Key characteristics of the Australian economy

GDP

Unemployment and inflation rate

Exchange rates and the Australian dollar

Week 2. Monetary policy and RBA

Monetary policy

The IS-LM model

Exchange rate stabilisation

Week 3. Fiscal Policy in Australia

Applying the modified AS-AD framwork

Week 1. The Australian economy in an nutshell

Key characteristics of the Australian economy

GDP

• Gross Domestic Product
  • the money value of all final goods and servies produced in a country in a given time period.

    $$GDP = C + I + G$$

    • G = Goverment spendings
    • C = Consumption
    • i = Investment
    • X = Exports
    • M = import

• real GDP
  • the value of final goods and services produced in a given year when valued at the prices of a reference base year

Unemployment and inflation rate

• equation

$$U = \frac{unemployed}{labour \\ force} \times 100 \\ = \frac{unemployed}{employed + unemployed \ \ actively \ \ looking \ \ for \ \ work} \times 100$$

• OKun’s Law

  

  • Okun's law is an observation that a rise in employment is often associated with a rise in GDP.

• Phillips curve and its trade-off

  

  • Labor demand increases, the pool of unemployed workers subsequently decreases and companies increase wages to compete and attract a smaller talent pool.

Exchange rates and the Australian dollar

• exchange rate
  • the price (value) of one currency relative to another currency.
  • the rate at which one currency can be exchanged with another currency
    • Depreciation
      • a decrease in the value of a currency relative to another currency
      • 0.8 USD / AUD → 0.7 USD / AUD
        • the AUD depreciates relatives to the USD (or the USD appreciates relative to AUD)
    • Appreciation
      • an increase in the value of a currency relative to another currency
      • 0.3 USD / AUD → 0.7 USD / AUD
        • the AUD appreciate relative to the USD (or the USD depreciates relative to the AUD)

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Week 2. Monetary policy and RBA

Monetary policy

• monetary policy as the use of the supply of money to achieve certain economic outcomes, or objectives.

• The supply of money is usually controlled by a central bank.

• kind
  • Contractinary monetary policy
    • This is when the Reserve Bank decides to increase the cash rate target, and decrease the supply of money. The practice described here is similar in many countries as well.
  • expansionary monetary policy
    • by increasing the supply of loanable funds in the overnight lending market, the Reserve Bank can reduce the market interest rate.
    • a reduction in Reserve Bank cash rank target is equivalent to an increase in the money supply.

  

The IS-LM model

• 3 equation
  • The phillps curve relationship

    $$\pi = \pi^e + m(Y-\bar{Y}) - \varepsilon_{S}$$

    • $\pi$ = inflation
    • $\pi^e$ = expected inflation
    • Y = output
    • $\bar{Y}$ = potential output
    • $\varepsilon_s$ = shock to Phillps curve
    • m = constant
  • the investment - saving (IS) relationship

    $$Y = a + Y^e - b(R-\pi^e)+\varepsilon_d+uY^* - vE$$

    • R = nominal interest rate
    • $\pi$ = expectied inflation
    • a, b= constant
    • $\varepsilon _d$ = shock
  • The Monetary - policy rule (LM curve)

    $$R = R+p$$

    • R = cash rate
    • $\bar R$ = Base rate
    • p = policy shifter

Exchange rate stabilisation

• interest parity(IP) condition

  $$(1+R) = (1+R^*)(\frac{E}{E^e})$$

  • $(1+R) > (1+R^*)(\frac{E}{E^e})$ : When the expected rate of return on domestic bonds is greater than the expected rate of return on foreign bonds
    • domestic bonds rate > foreign bonds rate
  • $(1+R) = (1+R^*)(\frac{E}{E^e})$ : When the expected return on domestic bonds is equal to the expected return on foreign bonds
    • domestic bonds rate = foreign bonds rate
  • $(1+R) < (1+R^*)(\frac{E}{E^e})$ : When the expected return on domestic bonds is less than the expected return on foreign bonds
    • domestic bonds rate < foreign bonds rate

• Interest parity condition (approcximation)

$$R \approx R^* \frac{E^e - E}{E}$$

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Week 3. Fiscal Policy in Australia

Applying the modified AS-AD framwork

• modifed IS curve with fiscal policy

  $$Y = a + Y^e - b(R-\pi^e)+\varepsilon_d+c_1G - c2T, \\ where\ \ c1, c2 >0$$

  • c1 = Goverment spending multiplier
    • spending incease or decrease
    • influence GDP or output

• Stabilisation function of fiscal policy
  • what happens to the interest rate, R, after a fiscal expansion or contraction, based on the AS-AD framework?
    • Unchanged (based on our monetary policy rule)

• A modified policy rule (Talor rule)

$$R = \bar R+d_1(\pi - \bar{\pi}) + d_2 (Y-\bar Y) \\ where \ \ d_1, d_2 > 0$$