1 ECON 11026 Assessment Item 3- Take Home Paper- Case Study Due date: Friday of Exam Week 13- Term 2 (12 October 2018 ) ASSESSMENT Weighting: 40 % weighting 3 Length: Approximately 2500 -3000 words (excluding questions, reference list, and tables/graphs) Case Study is based on topics covered related to macroeconomics weeks 7-11 Objectives This assessment item relates to course learning outcomes 1 and 4 as listed in the unit profile. Task description: In this task, you will build a case study based on the article: RBA decision 7th August 2018, provided on page 3 of this task sheet (along with the link). Guiding questions, found on page 4 of this task sheet will help you structure your response when building the case. Do not forget to apply the DADA framework, using data and graphs to support your response. A marking rubric is posted on the Moodle site, which can help you understand what is required to reach your desired level of achievement. Note: You will have to do research for this assignment to find some secondary data, tables and graphs from the ABS and RBA websites related to GDP, unemployment, inflation, exchange rates, interest rates and their impact on consumption demand, commodity prices, business investment and the housing market. Suggested way to approach the task 1. Get a good understanding of macroeconomic objectives, unemployment, inflation, the role of money, monetary policy, interest rates, the Reserve Bank of Australia (RBA), and economic growth from course resources. Refer to relevant chapters from the set textbook and other economics textbooks for theory. You also need to refer to other on-line articles and news items related to the case study. Draw on the work you have done at home or during workshop session solving the weekly textbook-boxed case studies as these will help you learn to think like an economist. 2. Read and take notes about the article RBA decision 7-Aug-2018 on pages 3-4 of this task sheet. 3. Look at the guiding questions on pages 4-5 of this task sheet. These will help you apply the theory to a real life monetary policy example of economics at work. 4. Conduct research (find related articles and search the RBA website) relevant to the current situation in the Australian economy and the RBAs role, function and conduct of monetary policy to keep inflation within the target rate. Find tables and graphs that show the current levels of inflation, interest rates, and money supply and the relationship between inflation, investment, GDP and interest rate, and use these to draw conclusions and justify your answers. 5. Read the How to write essays in economics guide available in the Assessment section of the Moodle site as this will help you adopt the appropriate writing style for your case study. Your assignment should have an introduction paragraph regarding the RBA case and applying theory to real life economics respond to the five (5) questions within 2 Five (5) body paragraphs. Be sure to connect the paragraphs with tables and graphs and have a final concluding paragraph. 6. Be sure you fully respond to each of the guiding questions, which are provided to give you direction when writing and building the case study. 7. Drawing on your research and notes about RBA decision 7-August-2018, apply the DADA framework while answering each of the questions (Definitions: define the key terms; Assumptions: list or make assumptions as required; Diagrams: draw relevant graphs/tables and explain; and original Analysis: apply the theory to real life economic examples and explain to justify your answer). Remember: a. Concepts and key terms must be defined accurately and completely. b. The assumptions upon which the analysis is based must be stated at the outset. c. Diagrams must be drawn properly and correctly labelled, explaining the relationships they depict. d. Analysis overall should be provided by relating economic theory to how interest rate decisions are made and their impact on real-life economics. 8. Review your draft case study against the marking rubric (located in the assessment section of the Moodle site) to be sure; you have addressed all key criteria. Make sure you have focused on the key macroeconomic objectives and applied macroeconomic concepts and theory to the role of money, banking, inflation, interest rates and the functions of the Reserve Bank of Australia. 9. Sources must be acknowledged using APA referencing style. Make sure you include in-text references to acknowledge others work and provide a reference list. 10. Plagiarism is an issue. Do not show your assignment to your classmates. 11. Due in exam week Friday 12 October 2018. Important Background Reading Regarding RBA RBA Monetary Policy Background Information http://www.rba.gov.au/ The RBA board meets 11 times a year (not in January) at the RBA in Martin Place, Sydney. Prior to the meeting, board members are provided with analysis of the economy and the financial markets by the RBA staff (prepared by the Economic Analysis Department). Among these analyses are the banks forecasts of future inflation, as well as the likely future path of economic growth overseas and domestically. RBA monetary policy decisions are based on these analyses as well as a range of other macroeconomic assumptions. In addition, scenarios are provided as to the likely macroeconomic outcomes if monetary policy was adjusted. The RBA meeting occurs on the first Tuesday of each month. After much discussion, a consensus decision is reached as to whether to leave interest rate unchanged or to adjust these rates. The instrument that RBA uses is the cash rate and, if an adjustment is decided, it will be to adjust the cash rate by 0.25 per cent, 0.50 per cent or 1 per cent. The most common adjustments are 0.25 per cent and 0.50 per cent. Since the last decade, the adjustment has been at 0.25 percent. With the unfolding of GFC, the RBA monetary policy response has been to cut the cash rate six times since September 2008 and cuts have been as large as one per cent. These cuts were designed to help Australia avoid the synchronised international recession, which hit all of the major economies in the 2008-2010 period. Once the decision is made, the RBA Governor announces its decision and, if a rate adjustment is made, banks will potentially make changes to their interest rates the following day. RBA also publishes the minutes of its Board meetings two weeks after each meeting and provides 3 quarterly statement on the Monetary Policy. The RBA does not set this interest rate (as the commercial bank sets its mortgage rate), but it continuously influences the rate through its daily financial operations in the money markets. If the RBA buys Treasury notes, the supply of excess reserves in the banking system increases and the cash rate falls. If the RBA sells Treasury notes, the supply of excess reserves in the banking system decreases and the cash rate increases. Because of these changes in the cash rate, interest rates in general are influenced. In May 2015, RBA cut the official interest rate to 2.0 percent, which remained unchanged for a year. In May 2016, RBA governor announced a cut in cash rate by 0.25 basis point, to 1.75 percent, which remained unchanged until August 2016. The official cash rate since August 2016 has been at the historical low of 1.50 percent for 2 hours. Focus reading for your case study Media Release Statement by Philip Lowe, Governor: Monetary Policy Decision https://www.rba.gov.au/media-releases/2018/mr-18-17.html Date 7 August-2018 At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar over recent months. In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June. These higher money-market rates have not fed through into higher interest rates on retail deposits. Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago. The Banks central forecast for the Australian economy remains unchanged. GDP growth is expected to average a bit above 3 per cent in 2018 and 2019. This should see some further reduction in spare capacity. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector. Australias terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years. The outlook for the labour market remains positive. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. Employment growth continues to be faster than growth in the working-age population. A further gradual 4 decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low. This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas. The latest inflation data were in line with the Banks expectations. Over the past year, the CPI increased by 2.1 per cent, and in underlying terms, inflation was close to 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1 per cent. Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5 per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRAs earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality. The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time. Suggested structure and guiding questions for your case study Introduction: Provide an introduction about the case. Question 1: Why does the RBA takes into account the domestic (Australian) and global (China, Japan, and USA) macroeconomic indicators (GDP growth rate, investment, household consumption, inflation, unemployment, and exchange rate) when making a decision whether to change (increase or decrease) or keep the official cash rate unchanged? Explain. Question 2: Explain the main objectives of monetary policy. List and describe the main functions of money and the Reserve Bank of Australia. Question 3: On 7-August-2018, the Governor of the RBA, Dr Philip Lowe, decided to leave the official cash rate unchanged at 1.50 percent as house prices continue to fall. Why did the RBA keep the cash rate unchanged for the last 2 years? Justify your answer with reasons and evidence. (Note: information found in detail monthly minutes of RBA) https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/ Question 4: Illustrate and explain using the money market equilibrium model and monetary transmission mechanism how an increase in the cash rate from 1.5% to 2% would help to keep inflation within the target rate, and how a further decrease from 1.5% to 1 % in the cash rate would help to stimulate the economy. In particular, discuss the effect on household consumption, business investment, GDP, inflation and housing market. Describe the circumstances in which the RBA Board might increase the cash rate. 5 Note: Use GDP, inflation, unemployment, fiscal deficit, and housing market data can be obtained from the Australian Bureau of Statistics and RBA websites for the last 5 years to see the trends, when answering this question. Question 5: Define economic growth. What are the determinants of long-run economic growth? Is the historically low interest rate of 1.50 percent (from August 2016 until the August 2018) sustainable to achieve long-run economic growth? Yes/No, justify your answer with reasons. Note: Students need to give their own views supported and justified by several references and examples. Conclusion: Provide an overarching conclusion to the case. Reference list: Use in text citations within your paper to refer to these references. -xxx
This assessment item relates to course
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