Australia’s Macroeconomic Policy

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Australia’s Macroeconomic Policy
Monetary policy also referred to as cash rate, refers to one of the processes through
which government institutions in a market economy regularly exercise influence on the
direction and speed of economic activity within a country. Many countries across the world
undertake this macroeconomic policy function through their central banks in the exploitation
of particular claims against it, thus enabling all economic players (e.g.–individuals,
businesses, and banks) conduct daily transactions, hence significantly influencing a country's
economic direction. Among the functions of monetary policy is the setting of loan interest
rates within the money market, and as a result, used as crucial influence factor on the
economic activities, inflation rates, prevailing interest rates, and the activities of all financial
players (both borrowers and lenders) in a dynamic economic environment. The Reserve Bank
of Australia has the mandate of setting and maintaining the monetary policy. The key
determinants of this system require the fulfillment of fundamental issues including price
stability, maximum citizenry welfare, employment rates, and economic prosperity goals.
The Australian economy has experienced consistent progress due to constant strong
performance premised on the country’s unlocking of investment and improvements in
boosting business confidence. As a result, the economy has remained robust even in the wake
of imperfect financial markets and economic meltdown across the globe. Inflation has been
controlled, interest rates kept low, and there has been a significant rise in employment rates, 
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which has resulted in an improved business environment, further boosted by the government's
infrastructure spending. However, the increased demand for Australian products and services
because of this favorable business operational environment has resulted in the Australian
dollar appreciating in value. This has had adverse effects on the economy, particularly
because of its status as an export-based economy, because exports become relatively more
expensive than imported goods. As a result, the strengthening of the Australian dollar has led
to exchange rates across all sectors related to trade increasing, thus affecting financial and
real equilibrium applicable to all areas of the economy, a primary function of the exchange
rate. Economic shocks are caused by high exchange rates which end up affecting
macroeconomic stability because smaller economies have currencies depreciate due to weak
economic performance and increased unemployment rates. Moreover, rising exchange rates
strain domestic rates of foreign markets, triggering capital outflows.
Additionally, if monetary policy is not conducted in a manner incompatible with the
elements of free trade in asset markets and high leverage on financial intermediation systems,
efforts to achieve price stability, reduce inflation, or attain maximum sustainable employment
may end up futile. Resolving any incompatibility necessitates making significant changes to
either affected elements simultaneously. Serious fundamental mistakes can occur upon
deciding to attain low-level short-term interest rates, which are accompanied by asset
purchases in large scale, and are detrimental to weaker economies. In particular, adopting
policies to lower interest rates may result in more inflationary pressures across the economy.
Solving this challenge could require tightened fiscal policy, through which
government taxation and spending is constrained, where the government spends only that
which is in its balance of payments. Austerity measures are adopted in the process, aimed at
reducing the state's structural deficit by using economic stabilizers based on the debt cycle.
With the contraction of the economy, the deficit will decrease, spending on unemployment 
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will increase, and vice-versa. In Australia, an increase in tax or reduction in the government
spending results in a dampening economic effect in reducing inflation (Garton, Danial
&Rhett 42). On the other hand, increased government recurrent and capital expenditure,
coupled with tax cut deficits might evolve multiple macroeconomic effects, and thus the
dollar value must constantly be monitored to ensure that it is consistent with macroeconomic
stability.
Australia's macroeconomic stability from various economic shocks can be attained by
a combination of flexible monetary policy and a floating exchange rate, specifically targeting
inflation. The adopted monetary policy rules are determined by inflation target models
(Giuseppe 33), and thus entirely avoid this particular challenge. This requires that these
models wholly consider inflation rather than inflation on just the goods circulating through
the economy.
Simple Keynesian models could be adopted, and des