Business Scenario and Events

The Australian furniture retailing industry exhibits moderate market share concentration, with the top four players (including BFE, it would be the top five players) estimated to account for just over 60% of revenue in 2018-19. These companies are:

Greenlit Brands Pty Ltd with 9,500 employees in Australia under brands including Fantastic Furniture, Snooze, Plush sofas, OMF Original mattresses.

Harvey Norman Holdings Ltd with 5,420 employees in Australia.

IKEA Pty Limited with 3,695 employees in Australia.

BBQSAM Holdings Pty Ltd with 3,430 employees in Australia under brands including AMart Furniture and Barbeques Galore

and of course our fictitious company, BFE- Best Furniture Store.

The remaining 40% of the furniture retailing industry comprises of small stores many of whom are family owned businesses with less than 5% of market share each.

There has been a sharp decline in the property market in Australia over the past year or so, however market observers are optimistic that it is starting to recover based on reports of higher attendance at auctions, a noticeable increase in the number of homes sold and a turnaround in property prices. Over the spring season which usually sees more homes bought and sold it is expected that even more homes will be sold.

The furniture industry employs a fair number of low skilled workers. The Government's policy on minimum wage therefore is something that BFE follows closely. Recent economic data shows that the level of spending in Australia by consumers is weak and some leaders feel that in order to boost GDP (Gross Domestic Product) and the economy, the Government should increase wages, especially of those with a relatively higher MPC (Marginal Propensity to Consume). As a result, there is a proposal raised in parliament to consider a minimum wage rate for low skilled workers to at least $30 per hour. The management team of BFE is observing this situation closely.

BFE's sales are 60% local, to Australian homes, and 40% exported overseas to customers in Croatia, Ireland, Malaysia, New Zealand, Singapore and Slovenia. While BFEbuys its stock of furniture from manufacturers based in Australia, its competitors import their stock from overseas. Recently due to recent global events such as the growing trade tensions between USA and China, "BREXIT" (the departure of United Kingdom from the European Union), increasing attention on climate change as well as other events, the Australian Dollar (A$) has been weakeningsignificantly. The value of the Australian Dollar is another item that the management team of BFE observes closely.

At a recent meeting, businesses in Australia including furniture retailers, called for the government to take the lead in promoting greater productivity by improving the country's infrastructure, in particular power and transport. The cost of power was the number one priority followed closely by access to affordable and reliable transport. Transport infrastructure in Australia is largely road-based and costs are impacted by fuel, distance and road conditions.

Australia's economy is managed by the country's Reserve Bank (RBA) and the Government. RBA recently decided to increase money supply in Australia, while the Government announced its aim to reduce the country's budget deficit by cutting spending over the next few years. As these macroeconomic policies affect the Australian economy, BFE pays close attention to these developments.

Question

Use the AD-AS model to illustrate and explain the effect on

Australia's GDP/economy

Inflation

based on the government's decision to reduce the budget deficit by cutting spending.

Give a short explanation of Monetary Policy.

Use the AD-AS model to illustrate and explain the effect that RBA's decision to increase money supply will have on

-Interest rates in Australia

-Australia's GDP/economy and

-Inflation in Australia.