Assignment 5 Students are to submit answers to the following exercises for grading on MyUni by 9pm Friday 28 May Question 1 Use the news article and the table from the RBA's May 2021 Statement on Monetary Policy to help answer the questions below RBA keeps interest rates on hold at historically low 0.1 per cent in May https://www.9news.com.auational/australia-interest-rates-may-2021-decision- rba-historic-low-lending-rates/551f0117-37c6-4c13-9f0b-69bb3dc757c8 The RBA's May 2021 Statement on Monetary Policy Outlook (https://www.rba.gov.au/publications/smp/2021/may/economic-outlook.html) includes the following table: Table 5.1: Output Growth and Inflation Forecasts) Per cent Year-ended Dec June Dec June Dec June 2020 2021 2021 2022 2022 2023 GDP growth -1.1 91/4 43 31/2 3 (previous) (-2) (73/4) 31/2) (31/4) (31/2) (3) Unemployment rate(b) 6.8 51/4 5 43/4 41/2 41/2 (previous) (6.8) (61/2) (6) (51/2) (51/2) (51/4) CPI inflation 0.9 31/4 13/4 11/4 11/2 2 (previous) (0.9) (3) 11/2) 11/2) (11/2) (13/4) Trimmed mean inflation 1.2 1 1/2 11/2 11/2 13/4 2 (previous) (1.2) (11/4) (11/4) (11/2) (1/2) (13/4) Year-average 2020 2020/21 2021 2021/22 2022 2022/23 GDP growth -2.4 51/4 5 31/4 (previous) (-23/4) (1/4) (4) (33/4) (31/4) (31/4) (a) Forecasts finalised on 5 May. Forecast assumptions (February Statement in parenthesis): TWI at 64 (63), A$ at US$0.77 (US$0.76), Brent crude oil price at US$68bbl (US$56bbl), population growth of 0.2 per cent over 2021 (0.2 per cent) and 0.4 per cent over 2022 (0.4 per cent); cash rate in line with market pricing out to 2022 (and held constant thereafter); and other elements of the Bank's monetary stimulus are in line with the announcement made following the February 2021 Board meeting. Forecasts are rounded to the nearest quarter point. Shading indicates historical data, shown to the first decimal point. (b) Average rate in the quarter Sources: ABS; RBA a) Explain with reference to the forecast data in this table why you think that the RBA kept the cash rate constant at its May meeting. [2 marks] b) Based on what Mala Raghavan said in the article, what are the key indicators that need to be met before the RBA would increase the cash rate? [2 mark] c) Assuming these key indicators are met. Explain how the RBA sets a target cash rate to conduct contractionary monetary policy to move an economy towards long-run equilibrium. Use an AS-AD diagram to illustrate your answer. [3 marks] Question 2 a) Using the AD-AS framework discussed in class, demonstrate the impacts of a tax cut on output and inflation in the short-run. (2 marks) b) What are the advantages and disadvantages of using fiscal policy? (1 mark)
