Monetary Policy - From an Australian perspective(2008)

Essay by Ri-RiHigh School, 11th gradeB, May 2009

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Natural fluctuations in the Trade or Business Cycle can have dramatic effect on a nation's economy. To reduce the effects of such extreme conditions, the Federal government makes one of its main roles to ensure economic stability by implementing polices and aiming to achieve the promised economic objectives.

When the Rudd government was voted to power, the Australian economy had been approaching the boom phase and was in need of specific intervention. This tender situation made broadcasting and choosing their new policies and economic objectives exceedingly important. Full employment, low inflation, sustained economic growth, price stability, equitable distribution of income, sustaining high standards of living and external viability are objectives most governments strive to achieve, with varying success largely compromised by the conflicting nature of these objectives. The most obvious of these incompatible objectives are full employment and low inflation, by succeeding in gaining less than 5% unemployment; more people have money to spend and this extra injection of cash into the economy places upward pressure on inflation rates.

The two are contradictory and are gained at opposite ends of the trade cycle; full employment heading up to a boom and low inflation down in a recession. As a result of these conflicts, governments aim to create a balance between the conflicting objectives and extremities of the Business Cycle, called the General Trend Line (GLT) when graphed in relation to the peaks and troughs of an unattended Trade cycle.

After an extended period of full employment and high inflation as the Australian economy headed for a boom, government policies have succeed in slowing the nation, perhaps overly so, and Australia now lies in the downturn phase. As shown in stimulus 4, through government intervention, the economy was spared reaching a boom phase and is now headed below the GTL.