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Economic Growth In Australian Economy Essay

783 Words4 Pages

Introduction
The Reserve Bank of Australia has decreased their interest rates to 2 percent in an attempt to stimulate the ‘weak’ economy. The article illustrates an example of how monetary authorities can utilize demand side policies in the form of expansionary policy to increase aggregate demand in an economy.
Analysis
In an economy, monetary policies manipulate the price and supply of money. They are imposed by central banks to reach certain macroeconomic objectives. In the case of the article, it is economic growth. In the article, Australia has decreased the interest rate to 2 percent to achieve economic growth by stimulating Aggregate Demand. Interest rates are charged when borrowing money, both when commercial banks borrow from central banks and when consumers or business owners borrow from commercial banks. Interest rates determine the cost that is …show more content…

Economic growth is the increase in an economy’s capacity to produce goods and services. This is done through raising aggregate demand. In the Diagram 2, the AD curve shifts outwards to AD 1. This causes real output to shift closer to its maximum potential, represented by the shift from Y to Y1. Economic growth can also reduce the ‘relatively high’ unemployment in Australia. This stimulates aggregate demand because unemployed consumers will have more money to spend when they find employment.
A side effect of increased aggregate demand is Inflation, which is the sustained increase in average price levels in an economy over a period of time. In Diagram 2, P1 shifts to P2 as a result of the increased aggregate demand. Excessively high inflation can be detrimental to an economy because businesses will consequently feel uncertain about costs of running in the future, causing investments (I) and therefore aggregate demand to decrease. This will decrease economic activity.
Diagram 2 - Effect of changing interest rates on the Australian average price

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