MCR001 A Economics Assignment Help

MCR001 A ECONOMICS 

TRIMESTER 1 2025

ASSESSMENT 2–MACRO ECONOMICS CASE STUDY

The Question

Use the attached Statement on Monetary Policy (SMP) February 2025 Overview by the Reserve Bank of Australia .The SMP sets out the RBA’s assessment of current economic and financial conditions as well as the outlook that the Reserve Bank Board considers in making its interest rate decisions.

Your task is to use the SMP–and other information as relevant-to write a brief on the current macroeconomic situation in Australia.

Writing the Brief

When writing your Brief, you should:

  • Firstly assess and comment on the key Macroeconomic Variables C,I,G,X, and and the relevant factors that influence them.
  • Secondly assess and comment on the key Macro economic Indicators inflation ,unemployment, and

    GDPgrowth and what these imply for the current state of the Australian macro economy.

  • Conclude your brief by applying your assessment of the key Macroeconomic Variables and Macro economic Indicators to the AD/AS Model to determine which phase the Australian economy is in.

Your Brief should be approximately 1,200–1,500 words, excluding references,and should use the following headings:

  1. Overview
  2. The Key Macroeconomic Variables
  3. The Key Macro economic Indicators
  4. The ‘AD/AS Model’(including diagram/s)
  5. Conclusion
  6. References

Submission

This assessment is due via submission on Moodle (via Turnitin) Friday 18 April2025 by 11:55pm.

This assessment is to be completed in groups of no more than four(4)students.

Only one(1)student per each group needs to submit the completed assessment on Moodle (via Turnitin).

This assessment is worth 30% of your total grade for this unit. The marking rubric for this assessment is included below.

Marking Rubric

 FailPassCreditDistinctionHigh Distinction
CONTENT and ANALYSIS(20 marks)     
Analysis is clear and logically structured:     
a.is note xcessively descriptive.     
b. clearly outlining and explaining the current economic situation in Australia using macroeconomic variables, indicators and the AD/AS Model.     

c. using macroeconomic frameworks ,analysis of the current economic situation is

logically deduced and argued.

     
d. demonstrating awareness of relevant concepts and issues in the analysis.     
e. critically engaging with appropriate and relevant literature provided in the analysis.     
WRITING and STRUCTURE(10 marks)     
The writing is well expressed:     
a.is comprehensible and coherent through out with a logical flow that correctly links concepts.     
b. with no or very few grammatical errors.     
c. vocabulary is appropriate to the context.     
d. formal referencing techniques applied correctly.     
Tables and figures:     
a. are clearly labelled.     
b. contain information that is referred to in the body of the Brief.     
c. have identifier sources (e.g.self-created, orcitation)     

Statement on Monetary Policy–February 2025

Overview

Key messages

Underlying inflation has continued to moderate and by a little more than expected.

Financial conditions are restrictive, which is weighing on demand and is helping to bring down underlying inflation. Growth in private demand has been subdued even though household consumption growth looks to have picked up late last year. Public demand has supported overall growth in economic activity over recent quarters.

Underlying inflation has moderated over the past three quarters. Trimmed mean inflation eased to

3.2percent over2024.It is expected to reach the 2–3 percent target range in early 2025,which is sooner than expected at the time of the November Statement. Headline inflation declined to

2.4percent over2024.Head line inflation remains lower than underlying inflation, mostly because of the impact of federal and state government subsidies to households.

The labour market has remained strong. 

The unemployment rate declined a little in late 2024 to 4 per cent. Much of the strength in the labour market has been under pinned by strong employment growth in the non-market sector,which in turn has affected labour market conditions in the market sector as both compete for labour. Employment growth has also bolstered house hold incomes.

Outside of the labour market, there is some evidence that capacity pressures have eased. The recent moderation in underlying inflation, alongside a persistently tight labour market and elevated growth in input costs, is consistent with many firms finding it difficult to fully pass on input cost increases in the current environment of subdued growth in demand. Demand also seems to have eased in the housing market ,which has seen a material slowing in housing and rental price increases.

The outlook remains uncertain.

The announcement of tariffs between the United States and other major economies poses challenges to the global outlook. But the scale and incidence of the tariffs and their effects remain highly uncertain – which may itself delay some investment until the outlook becomes clearer.

Economic activity strengthened in China but growth there is still facing structural headwinds.

Economic growth is forecast to pick up and the labour market is forecast to remain tight. These forecasts are conditioned on the market implied cash rate path, which had built in90 basis points of easingbymid-2026.House hold consumption growth is expected to pickup, which along with growth in public demand is expected to see output growth increase over the coming year. As a result, the unemployment rate is forecast to rise only a little.

If the cash rate follows the market path, underlying inflation is projected to be a little above 2½ per cent over most of the forecast period. The anticipated recovery of GDP growth and lingering tightness in labour market conditions are expected to sustain some upward pressure on inflation.

The Reserve Bank Board decided to lower the cash rate target by 25 basis points, acknowledging disinflation progress, but the Board is cautious about the outlook.

Monetary policy has been restrictive and will remain so after this reduction in the cash rate. However ,the outlook remains uncertain. In removing a little of the policy restrictiveness ,the Board acknowledges that progress has been made but is cautious about the outlook.

What’s been going on in the economy?

Global policy uncertainty is high.

The economic environment remains challenging due to changing  global trade policies and ongoing geopolitical tensions. Output growth in China picked up towards the end of last year, while US growth has remained robust and the unemployment rate there has stabilized at a low level. Growth in other advanced economies has remained subdued. However, the announcement of higher tariffs between the United States and some of its major trading partners, along with broader geopolitical tensions, has created a highly uncertain global environment.

Most advanced economies have seen further reductions in inflation, but the imposition of tariffs could undo some of this progress, particularly in the United States. Underlying inflation has eased further in most advanced economies, with services inflation still elevated but easing towards levels consistent with historical averages. Goods inflation has picked up gradually, returning to around historical averages. Having reduced policy rates noticeably ,some advanced economy central banks have now signalled that any further policy easing is likely to be more gradual. Market participants have pared back their expectations for future policy easing in the United States as progress on disinflation has slowed and the unemployment rate has stabilised.

Financial conditions in Australia are restrictive and are weighing on private domestic demand.

Monetary policy is restrictive, although some indicators of financial conditions have eased over recent months. Market participants brought forward the date at which they expect the cash rate to be lowered following the December Board meeting, as the Board noted it was gaining some confidence that inflation was moving sustainably towards target, and in response to lower-than- expected inflation and GDP. Reflecting this, and the uncertain global outlook and broad-based

US dollar strength, the Australian dollar has depreciated somewhat against the US dollar and on a trade-weighted basis. Lending rates to households and businesses are elevated, and households’ debt-servicing payments remain high as a share of household income. Despite the high cost of financing, housing and business credit growth have picked up a little further, and wholesale market funding conditions remain favourable and supporting issuance.

Restrictive financial conditions have weighed on private demand, while public demand has supported growth in economic activity and employment. GDP growth remained subdued in the September quarter and household consumption growth continued to be modest. There was evidence of an increase in household spending toward the end of 2024,though it is difficult to assess how much is genuine momentum following a pick-up in real income growth and consumer confidence, and how much reflects a concentration of spending around large sale events. Growth in public demand has remained strong, supporting overall growth in real activity during 2024.
Despite subdued growth in output, strength in the labour market has persisted. The earlier easing in labour market conditions stalled in the second half of 2024 with some key indicators tightening a little towards the end of the year. In particular, the unemployment rate declined to 4 percent in late 2024, showing more strength than expected at the time of the November Statement. Also, demand for labour, especially in the non-market sector, remains strong; employment growth has continued to outpace population growth and vacancies are elevated. The participation rate has also reached historically high levels.

Labour cost growth has eased but remains high. Private sector wages growth eased in year-ended terms in September, but was steady at 0.8 per cent in quarterly terms. This is consistent with the recentstabilisationinlabourmarketconditions.Publicsectorwagesgrowthremainedsolidthoughit has been volatile ,in part reflecting the timing of when enterprise bargaining agreement stake effect. Overall, solid growth in wages along with still-weak productivity – which is around pre-pandemic levels – has kept growth in unit labour costs above rates consistent with inflation being at target.

How do we see the economy developing?

Changing trade and fiscal policies could significantly alter the trajectory of global growth.

The outlook for global growth is uncertain because of unpredictability around government policies .In the absence of clear information, Consensus forecasts are little changed since November. The central forecast for growth in Australia’s major trading partners is unchanged at 3.4 per cent in 2025 and is slightly lower for 2026.In North America ,growth for 2026 has been revised lower due to the prospect of tariffs in the region. But our outlook for growth in China has been revised up, reflecting expectations of additional fiscal stimulus more than offsetting the effects of increased tariffs. These forecasts could change quickly and significantly.

Growth in Australia is expected to return to its trend rate.

GDP growth is forecast to pick up over 2025, with a broadly similar profile to that in the November Statement from the middle of the year. An upward revision to the outlook for public spending growth and a small lift to net exports from the depreciation of the Australian dollar are expected to be broadly offset by a softer outlook for growth in consumption. Household spending in the December quarter looks to have been a little stronger than expected, but this was underpinned by retail promotions and discounting, and some of this is not expected to persist. At this stage, given the still- evolving international environment, we assume there are limited effects on domestic growth and inflation from recent announcements related to international trade. But there are significant uncertainties around this central case, and prolonged uncertainty may itself bear down on growth if households and firms choose to delay planned spending.

The unemployment rate has been revised down over the forecast period in light of the unexpected recent strength in labour market indicators. The unemployment rate is expected to increases lightly in the near term, reflecting subdued growth of economic activity in late 2024, and to remain at this rate over the next couple of years as the pick-up in GDP growth provides support for labour demand. Growth in labour productivity is expected to remain weak over the coming year,which will weigh on the economy’s supply potential, before picking up. Growth in unit labour costs is expected to moderate from elevated levels as productivity growth picks up.

Underlying inflation is expected to return to the 2–3 percent target range this year and, if the cash rate follows the market path, to be a little above the mid point over the forecast period.

On the back of lower-than-expected CPI data in the December quarter, the near-term out look for inflation has been revised a little lower for 2025. Some of this revision is also based on subdued growth of demand, with an easing of capacity pressures in some parts of the economy and what appears to have been compression of margins for some firms .However ,the pick-up in GDP growth and tight labour market conditions are expected to keep underlying inflation a little above

2½percent for most of the forecast period.

Headline inflation is expected to be volatile over the coming year, before settling in the target range in 2026. Governments’ cost-of-living support measures to households – such as electricity rebates–are legislated to end in 2025,which is forecast to lead to a temporary increase in headline inflation.

The outlook remains uncertain.

An escalation of current global trade tensions could lead to an economic slowdown in Australia. This would probably occur through the effects of weaker growth in China and other major trading partners, disruption of supply chains, and the negative impact of trade policy uncertainty on business investment and house hold spending in Australia. The Australian dollar would be likely to depreciate, acting as a shock absorber to some extent by supporting the competitiveness of Australia’s exports while also adding some inflationary pressure from higher import prices in the near term.

In Australia, the recent run of domestic data have provided mixed signals about the economy. The paths of unemployment, activity and inflation from here are uncertain. The unemployment rate could decline a little further in the near term, consistent with some indicators ,or it could increase by more than expected if the recovery in private demand does not materialise. The outlook for consumption is complicated by uncertainty around seasonal patterns and the extent of underlying momentum.

There are uncertainties around our assessment of the degree of balance between supply and demand in the economy and in the labour market. Weaker parts of the economy that face fewer capacity constraints could have a greater bearing on the path of inflation. There is also a risk that we have overestimated the extent of excess demand in the labour market. These factors would see inflation declining more quickly and by more than forecast.

What did the Board decide?

At its February 2025 meeting, the Reserve Bank Board decided to lower the cash rate target by 25 basis points to 4.10 per cent. Monetary policy has been restrictive and will remain so after this reduction in the cash rate. Some of the upside risks to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected. Nevertheless, upside and downside risks to the outlook remain. If monetary policy is eased too much and too soon, disinflation could stall and inflation would settle above the midpoint of the target range. In removing a little of the policy restrictiveness, the Board acknowledges that progress has been made but is cautious about the outlook.

 

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