Week 10 Monetary Policy PDF

Okay, so basically, so let\'s start off by understanding monetary policy. 8:54 - Okay, I don\'t like this. 9:02 - All right, so let\'s have a quick look. 9:06 - All right, on what monetary policy is 9:10 - So monetary policy is basically implemented by the central bank. 9:18 - So...

Okay, so basically, so let\'s start off by understanding monetary policy. 8:54 - Okay, I don\'t like this. 9:02 - All right, so let\'s have a quick look. 9:06 - All right, on what monetary policy is 9:10 - So monetary policy is basically implemented by the central bank. 9:18 - So in Australia, the central bank is the reserve 9:26 - bang of... 9:31 - Okay, or... 9:33 - In short, that is your RBA. So RBA is the Reserve Bank of Australia. 9:36 - So what is the difference between Reserve Bank of Australia and our normal banks? So normal banks are commercial banks, for example, Commonwealth Bank, National Australia Bank, ANZ, West Bank. 9:42 - Bang SA, Bendigo Bang, lots and lots of other banks. Those are for the public. 9:54 - Okay, that\'s where we say so it\'s either for the individuals like any one of us to open an account okay or for businesses okay various reserve bank 10:01 - we can\'t none of us can open up an account with Reset Bank. Reserve Bank is basically a bank 10:11 - for all the banks, right? So where do all the banks deposit their money? So DR Bank would be the recent bank and also with Teresa Bank, that\'s where the government has an account as well. 10:17 - So we say basically monetary policy is implemented by the Reserve Bank of Australia. 10:30 - All right, so here the actions taken to manage 10:38 - interest rates to pursue the macroeconomic objectives. So that means basically ensure that basically involves changing cash rate 10:42 - or sometimes 10:56 - It\'s basically the same as your interest rates okay so whenever we talk about monetary policy, it is by the Reserve Bank and it is involving the change of interest rate or the cash rate. 10:58 - So what do we want to achieve? Remember. 11:13 - We want the economy to be at long run equilibrium. So at long run equilibrium. 11:17 - What do we want? We want full employment. 11:24 - Okay, stability of the um 11:28 - Australian currency in other words here it could be also price 11:30 - In other words okay um to achieve 11:37 - Okay, or a target 11:43 - inflection rate in Australia. 11:45 - Whoops, why did it come out? 11:50 - Oh. 11:53 - Okay, to achieve our target inflation rate of about two to three percent that\'s for Australia. 11:58 - Okay, so when we talk about Austrian stability of the Austrian currency, in other words, the price stability or basically to achieve a target inflation rate to be about two to three percent and then we want economic prosperity or welfare or in other words, we want 12:04 - They cannot make those. 12:23 - okay so these are the three main goals. 12:27 - all right for um 12:30 - for using monetary policy. So we want economy to be a long run equilibrium. Remember, using our ADA as model long run equilibrium or full employment equilibrium is where the three curves intersect okay so we want full employment, we want price stability, and we want economic growth. 12:33 - So this is where we talk about the target inflation rate. 12:55 - Okay, we want it to be about 2% to 3% in Australia. 12:59 - Now, when I talk about the cash rate, what\'s the difference between cash rate and interest rate? 13:05 - Now, when any one of us hit, we need to borrow money from the bank 13:13 - Okay, we go up to one of the commercial banks okay and let\'s say I need money to buy a house. 13:18 - So I\'ll go up to the bank and say, I need money to borrow money to buy 13:24 - And obviously, on top of when I repay the bank. 13:29 - Not only the loan amount, but there will be 13:34 - an interest rate attached to it. 13:39 - Okay, so let\'s say if I went to the bank and let\'s say I borrowed 13:41 - I took out a loan, I borrowed one towel. 13:47 - Okay, \$100,000. 13:50 - Okay, so when I repay 13:53 - I will repay this 100,000. 13:57 - plus any interest rate. 14:01 - Okay, so if the interest rate is 10%, then obviously on top of the 100,000, I will still need to pay another 10% off on the repayment, on the money borrowed okay so that would be an interest rate. It applies to when any public goes to the bank to borrow money. 14:04 - Now, cash rate is about the same thing. 14:23 - However, it is basically 14:27 - Thank you, Harry. Thank you. The interest rate that 14:31 - banks okay so sometimes banks could be like any one of us here. They might not have enough money 14:35 - Okay, and that means they will have to borrow money from each other. 14:41 - All right, so when banks don\'t have enough money, they will have to borrow money from each other or they can borrow money from Reserve Bank. 14:46 - So when they borrow money, it\'s the same thing. They will have to repay not only the amount of money borrowed. 14:54 - But there will be a form of interest rate, which we then call a cash rate. 15:01 - Okay, so that\'s the cash rate that the banks will have to pay or when they borrow money from each other. 15:07 - All right. So basically, in this case the interest rate cash raise the interest rate that financial institution charge on loans 15:16 - or pay to borrow funds in the overnight money market. That is basically when they borrow money from each other overnight. 15:25 - okay so they pay a form of interest rate and that is called the cash rate so the cash rate then flows onto the interest rate interest rates then affect 15:32 - Okay. 15:42 - And the consumption, the investment and the net exports. 15:45 - All right. So basically here, I won\'t worry too much about the money supply model okay we are saying that we\'re going to use interest rates to control inflation. 15:49 - Now, if you remember last week or um 16:00 - when we talk about 16:04 - Okay, your AD, so remember your aggregate amount. 16:07 - who demand goods in the economy? 16:12 - Remember your AD equation. We\'ve got four sectors, consumption household spending 16:16 - Investment, firms and businesses, government purchases and the 16:22 - And X. 16:28 - Okay, and remember I told you very, very important, okay, you know. 16:30 - Okay, what will cause C? What will cause I? What will cause G? What will cause your NX? 16:36 - Okay, to change. And as a result of that 16:43 - 80 will change. 16:47 - Now, basically, in general. 16:49 - Any change in interest rates, as I\'ve mentioned before, it will affect consumption 16:51 - households borrowing and savings okay so basically here 16:57 - We say interest rates. 17:02 - will affect. 17:06 - Okay, so interest rates will basically affect 17:15 - borrowings 17:25 - And... 17:27 - Okay, so that means in this case here it will affect 17:29 - how what households will do 17:33 - Okay, when interest rates are high or when interest rates are low 17:37 - All right, so here we say if interest rates are high 17:42 - then households would rather save money 17:47 - Rather than spend, because if you put your money in the bank, you can earn higher interest rates. 17:51 - And it\'s too expensive to borrow money to spend. So consumption would say so here let\'s have a look 17:57 - All right, if interest rates are high. 18:05 - Okay, we say households were out to save money 18:07 - Okay, to get higher interest rates, get high return rather than borrow money okay because it\'s too expensive to borrow money for spending. So we say as a result of that, consumption will fall. 18:10 - Same with your businesses. Remember, businesses borrow money to buy machinery and build factories, buy equipment. So if interest rates is high, the cost 18:23 - of borrowing money is too expensive. So firms and businesses will cut down their spending on buying machinery and equipment or even building a factory okay so i will fall and don\'t forget included in investment is when someone buys a new house. 18:34 - Okay, so quite um often 18:52 - In Australia, people don\'t buy a house using cash unless you are very, very, very rich okay most of the time people have to borrow money to buy a house. So if interest rates are too high, then obviously a lot of people will not be able to afford to borrow money to buy a house. 18:55 - Now, with net exports, we have not looked at this in detail and we\'re not going to look at this in detail in this course. So for those that are moving on to macroeconomics, you would see that interest rates will also affect net exports. And that is true exchange rate. So I won\'t worry too much about it. 19:13 - about how exchange rate will affect your exports and imports, even though I\'ve provided some explanation there, you just need to know for net exports that in this case, higher interest rates, net exports will also decrease. 19:37 - Now, on the other hand, if interest rates are low, if there\'s a fall in interest rates, then what happens? 19:54 - Basically. 20:01 - putting your money in the bank is not going to be worthwhile. You\'re not going to earn a lot out of it okay so therefore in this case, people will probably just spend your money okay or it\'s also cheaper to borrow money for um 20:03 - buying goods okay um so that\'s where consumption will actually increase. Same with businesses okay borrowing the cost of borrowing is low. 20:19 - So firms and businesses will be more willing to borrow money to invest in factories and machinery building factories, and also households borrow money to buy new house. 20:29 - All right. And also your NX world rights. 20:42 - So very important understand that 20:47 - Okay, interest rates 20:51 - will basically affect. 20:54 - CI and your NX. Now, if a question comes up in the exam that what happens if there\'s increase in interest rates, you do not just tell me c i and x will decrease. 20:56 - you must a good answer will basically provide some explanation why each of these components or how each of these components will be affected. So it\'s very important you actually know why 21:09 - Okay, how your CI and X will be affected 21:25 - With the change in interest rates. 21:30 - Okay, so if you are just going to say interest rates goes up c i nxo fall 21:33 - you are not going to get good marks for it. 21:38 - okay compared to one where they provided some explanation 21:40 - All right, so now we can basically 21:48 - Okay, so when we talk about monetary policy, as I\'ve said earlier on. 21:52 - dirt basically in walls 21:58 - changing your cash rate 22:01 - the interest rate and there are basically 22:03 - two types of monetary policy. 22:06 - okay so 22:09 - In this case, yeah, we can talk about the two different 22:11 - Two types of monetary policy. 22:16 - All right, so MP. 22:22 - is your monetary policy in this case? 22:25 - Okay, so basically one of the two different types of monetary policy so the first one 22:29 - is what we call x 22:37 - Pensionary monetary policy. 22:38 - And then we have one tractionary 22:42 - Monetary policy. 22:46 - So this is where now we want to look at X. 22:48 - pensionary. 22:52 - Okay, monetary policy. 22:54 - So let\'s look at expansionary 22:56 - monetary policy. 23:00 - Now, as the name suggests. 23:02 - Okay, this is basically 23:05 - implemented when there is a need 23:09 - to expand the economy. 23:14 - All right, so with expansionary 23:21 - That is when we need to 23:25 - Expand the economy. 23:27 - Okay, that means in other words here, there is a need 23:31 - to increase. 23:35 - aggregate demand. 23:37 - All right, so expansionary, we need it to grow. That means we need aggregate demand 23:40 - to basically 23:46 - increase so that means this is implemented 23:49 - when they can know me. 23:54 - is faced with. 23:57 - high unemployment. 24:01 - or in 24:05 - recession. 24:07 - Thank you. Okay, so when economy is faced with remember 24:11 - We want full employment. So if you\'ve got high unemployment, we need to basically increase our employment so that unemployment will be lower or when the economy is in a recession, we need the economy to basically grow. 24:16 - So that means who can tell me what should Reserve Bank do with the interest rates then? 24:32 - So we need 24:40 - Okay, A.D. 24:42 - to increase so what should reserve bank do with interest rates? 24:44 - So let\'s basically think about this. 24:49 - And remember, your AD. 24:52 - You should see. 24:55 - I, G, N. 24:58 - the annex. And we need a d 25:01 - to increase. 25:05 - Very good. Okay, so here we see. 25:10 - We need AD2 basically 25:16 - increase we need this to increase. 25:20 - So that means, in other words, we will want c 25:23 - I and your NX. 25:27 - to increase okay so hidden the eye there 25:31 - So we want c i and x to increase. So what should Reserve Bank do with the interest rates? 25:35 - So to encourage people to spend, to encourage firms to borrow money. 25:43 - which a bank should drop the interest rate. 25:48 - By dropping the interest rate, what happens? People will be more willing to borrow money for spending. 25:52 - Same with firms and businesses. 25:58 - And this will also cause the NX to increase. 26:01 - So we say Reserve Bank should 26:05 - decreased the interest rate. 26:08 - Okay, or your cash rate. 26:12 - Again, by decreasing interest rate, you can see from my diagram here c i and x okay so by decreasing interest rates, what happens 26:15 - C-I-N-N-X will go for 26:27 - Oh, sorry. 26:31 - will increase. 26:33 - And as a result of that. 26:35 - AD will increase 26:37 - And two. 26:41 - Right. Okay. So this is your expansionary 26:44 - monetary policy, whereby we say to encourage AD to increase 26:50 - Reserve Bank will need to decrease. 26:56 - the cash rate or the interest rate by doing that 27:00 - CINX will increase. 27:03 - AD will then increase and shift to the right so as i said earlier on 27:06 - It\'s very important that you provide some explanation. 27:12 - Y, C will increase, yi will increase, and X will also increase. 27:16 - Okay, so that means in other words. 27:23 - Let\'s have a look at this diagram. 27:26 - Assuming economy was initially at long-run equilibrium, that means we\'re currently 27:31 - at point C. 27:38 - Okay, now there is a decrease in consumer confidence 27:40 - So what do you think will happen to the economy now? If there is a decrease in consumer confidence, so let\'s try and work that out. So with the decrease. 27:46 - in consumer 27:57 - confidence. 28:00 - Okay, so think about your AD. 28:02 - Remember, aggregate demand is a C. 28:06 - I, G. 28:10 - and your annex. 28:12 - Okay, so when there is a decrease in consumer confidence 28:17 - which component of AD will be affected? 28:24 - So we know from last week\'s topic, remember last week I told you it\'s very, very important. You know the factors that will shift ad you know the factors that will shift your SRAS. So consumer confidence, it\'s got nothing to do with cost of production. 28:29 - It\'s got nothing to do with technology. 28:46 - It\'s got nothing to do with amount of resource. So it cannot be the SRAS cap. 28:49 - So it must be your AD card. That\'s how you eliminate 28:55 - okay is it going to shift SRES or is it going to be AD? So in this case, it will be ad 28:59 - Once you identify it is AD, 29:05 - which component of AD will this be? 29:09 - In this case, it\'s quite clear that it is referring to consumer. 29:13 - So that means household consumption will basically fall. 29:18 - Okay, so that means in this case, you need to explain 29:25 - We have a fall in consumer confidence. 29:28 - The household consumption will fall. 29:31 - So when consumption fall, what happens to your AD? 29:34 - It will then cause your AD to fall. 29:39 - Okay, so that means that 29:43 - You can know me now. 29:45 - The AD will now decrease. 29:47 - and shift to AD1. 29:50 - So it has no policy, we\'re going to end up with a 29:54 - d1 okay so with a decrease in consumer confidence 29:58 - aggregate demand will decrease. 30:04 - And shift to the left to 81. 30:09 - So that means now 30:15 - The economy is going to be, so let\'s assume now the economy is going to be 30:17 - will now be 30:25 - That\'s going. 30:28 - Okay, so let\'s have a look down at 30:36 - point eight remember point eight is a short 30:39 - Run. 30:44 - equilibrium. 30:46 - So at point eight. 30:48 - what is going to happen? 30:50 - Locate a price level. 30:53 - price level would have decreased 30:55 - Okay, so price level would have decreased. 30:59 - So at point eight 31:03 - price level decrease 31:06 - to rise level one. 31:09 - what happens to your real GDP? 31:12 - So now what happens? 31:17 - Real GDP. 31:20 - will decrease. 31:23 - Okay, two. 31:26 - Y, E. 31:28 - All right, now remember 31:32 - YP is basically your full employment. 31:34 - Okay, so NYP, that would have been 31:42 - at full realignment. 31:45 - So what happens now as a result of a falling consumer confidence? 31:54 - Again, economi will now move to point eight. 32:00 - which is a lower price level. 32:04 - Your real GDP is actually now lower. 32:07 - So that means what happens now. 32:11 - Your real GDP is now less than your full employment GDP. 32:13 - you can know me is in a 32:20 - recession. 32:24 - Okay, so Economy will now be 32:30 - in a recession. 32:32 - Now, what happens to unemployment? 32:35 - So YE is less than yp. 32:40 - Konomi is producing. 32:44 - When economy is producing less, what happens then? 32:47 - That means on 32:53 - employment 32:56 - Well, relax. 32:58 - Okay, so that is at point eight remember point 33:02 - Point A is the short run equilibrium. 33:06 - whereby the economy initially was at long run equilibrium, but because of a fall in consumer confidence. 33:11 - Adika would have shifted. 33:19 - to the left okay so we\'re now 33:21 - with at point A is a lower price level 33:24 - However, what happens to your real GDP? Real GDP has decreased? 33:28 - Real GDP is now below. 33:33 - your full employment GDP. 33:36 - So therefore, when the economy is in a recession, economy is also producing less so unemployment will rise. 33:39 - So in this case. 33:49 - What can the Reserve Bank do? 33:52 - to get taken on me so basically 33:55 - What policy can the Reserve Bank use? 33:58 - can reserve bank implement. 34:05 - To get the economy. 34:12 - too long run. 34:17 - Okay, very good. So this is where 34:25 - you will need to then identify 34:28 - that in this case, because the economy has gone into a recession 34:32 - Then we need to expand. So there is a need to now expand the economy. 34:37 - That means the Reserve Bank should 34:45 - implement 34:49 - Expension, right? 34:51 - monitoring policy. 34:54 - Okay, so this is where then you will need to explain 34:56 - For expansionary monetary policy, it\'s a bank 35:00 - will need to decrease. 35:05 - the interest rate. 35:09 - Okay, so by decreasing interest rate 35:12 - what happens c i 35:17 - nx will rise 35:20 - And for AD will increase 35:23 - and shift to 35:28 - Right. 35:31 - Okay, so that means in this case, what happens now? 35:33 - AD is basically we say shifted 35:38 - to the left without policy 35:41 - Now, with a policy being implemented. 35:44 - Your AD can basically shift back. 35:47 - from AD1 without policy 35:51 - Back to your AD. 35:55 - Okay, and this time with policy, it will pop up. 35:58 - Do you want. 36:02 - Okay, so basically 36:08 - we implement expansionary monetary policy to get 36:10 - the AD curve to shift back. 36:16 - to the right. 36:19 - all right it\'s everyone good 36:22 - so far. Does anyone have any questions? 36:24 - So basically, what I\'ve explained that 36:30 - Okay, and this is the diagram in your slides 36:33 - that basically show if economic was at point A to get it back to your full employment 36:38 - we will need to use expansionary monetary policy 36:46 - okay to get the economy back to 36:50 - Let\'s see. 36:53 - Is everyone good? Does anyone have any questions? 36:55 - No question. Everyone good? 37:06 - Yep, I can go back to the previous slide video. 37:12 - all right so remember in the exam 37:22 - you are given set of diagrams. You won\'t need to select the correct one. 37:25 - Okay, so basically you could be given 37:31 - let\'s say a diagram 37:36 - Okay, thanks, Risa. 37:41 - So you could be given a few diagrams. You will need to then identify which is the correct diagram to sure 37:43 - Okay, expansionary 37:50 - monetary policy. 37:55 - So all this will not be there. It would just be labeled as maybe 82 or 81 37:57 - Okay, and the curls can shift either way. 38:03 - So you will need to then be able to identify 38:06 - okay for us to be using expansionary monetary policy, the economy must have been below full employment. 38:09 - that is where we will need to expand it. 38:18 - to get to point C. 38:22 - All right. So that is expansionary when the economy is faced with a recession or when economy is basically have high unemployment. So you can basically see by using expansionary monetary policy, how we can then able to get the economy 38:24 - Basically, back to 38:43 - full employment so you can see after your ad cover shifted 38:46 - You\'re back to full employment. 38:49 - Okay, and the price level goes back to the equilibrium price level. 38:51 - Right. Now, what about then 38:57 - contractionary so we now want to look at 39:00 - contractionary monetary policy 39:05 - When will this be implemented? 39:12 - So for contractionary monetary policy this will be 39:20 - implemented 39:25 - When there is a need. 39:28 - to contract. 39:32 - In other words, when we need to decrease 39:34 - Okay, so you can see as the name suggests 39:43 - We need to contract. 39:46 - the economic 39:48 - Okay, or we need to decrease AD. So in particular, this is when 39:51 - Konami is faced with 39:58 - High inflation. 40:02 - So when we\'ve got high inflation, remember, we want to reduce 40:05 - we need to reduce inflation. 40:10 - Okay, to the target. 40:15 - Increasingly. 40:17 - All right. Two, two, three. 40:20 - all right so if inflation is too high as what Australia is currently facing, so even though it\'s not as high as back in end of 2022, end of 2022, Australia\'s inflation rate was about 7.8%. 40:23 - Which was definitely, definitely very high compared to what we actually want. 40:38 - Okay, so currently inflation rate is about four percent 40:43 - Okay, but it\'s still a little bit higher than the target rate. 40:47 - All right, so that means here, this is where over the last few years, since end of 40:51 - I think it was since mid of 2022 okay reserve bank of australia to control inflation okay so um i think it was in 40:58 - early 2022, inflation rate in Australia started to show signs of going up. So it was not only in Australia, basically in a lot of countries because of, you know, Panup\'s spending and things like that. So basically then inflation started to pick up in mid 2022. So what should the bank do? 41:09 - when inflation is high, to bring inflation back down 41:31 - Reserve Bank should. 41:35 - increase interest rate. 41:37 - Okay, so remember 41:41 - by increasing interest rates, what happens 41:43 - C, I. 41:47 - And NX will decrease. 41:51 - So we\'ve got four a d will decrease. 41:56 - and shift to 42:01 - The... 42:04 - Okay, so contractionary 42:07 - We need to decrease aggregate demand. 42:09 - So in other words here, we want to decrease inflation so economy is faced with very high inflation. We want to bring inflation down. So what should Reserve Bank do? We will need to increase the interest rate. 42:15 - all right so it is by increasing interest rate, it encouraged people to be saving money 42:29 - Okay, because I\'m going to get higher returns. It discourage people from borrowing money for spending 42:34 - So C, I, and NX will then decrease 42:40 - AD will decrease and shift to the left. 42:44 - So let\'s have a look here. 42:48 - Assume economy was initially 42:51 - at long run equilibra. 42:55 - Okay, that means economic. 43:00 - Ace at point B currently. 43:03 - Now, what happens if you have got demand 43:06 - cool inflation. 43:11 - So as the name suggests, it\'s an inflation caused by 43:13 - an increase in demand. 43:18 - Okay, so when you talk about demand for inflation, which I\'ve mentioned before, I think in week eight, when you talk about inflation, there are two types. 43:21 - So the month total inflation, as the name suggests this is when 43:31 - This is due to increase in your AD. 43:37 - Okay, so demand pool 43:41 - Compared to cost push, cost push is when your cost of production because of an increase in cost of production. So that will affect your short run agricult. So with demand pool inflation. 43:44 - It\'s basically your AED will basically shift. 43:56 - to the right. 44:00 - Okay, so let\'s say with an increase in your demand pool inflation, economy will now end up to 81 44:02 - Okay, so what happens to a price level? 44:12 - So you can see why it\'s level. 44:15 - has basically gone up. 44:19 - And your real GDP. 44:24 - he\'s gone above. 44:27 - Okay, so basically with demand pool inflation 44:30 - AD would have increased and shifted to the right 44:34 - They can know me. 44:38 - is no. 44:40 - at home. 44:42 - So at point A, remember it is your 44:46 - short run. 44:50 - So at point A, what happens, as you can see from the diagram 44:57 - price level has increased 45:01 - to price level one. 45:04 - Okay, that means that 45:07 - there is now high inflation. 45:09 - All right. And you can see your real gdp 45:13 - Is your Y-E? 45:18 - is now above 45:21 - You\'re YP. You\'re absolutely. 45:25 - Okay, so that means that 45:28 - Konami is producing more 45:30 - All right. So what is the problem here? 45:42 - The problem here is the price level has gone up. 45:45 - Okay, so we\'ve got a high inflation and we are also having labor shortages now. 45:49 - All right, so what should the Reserve Bank do now? 45:56 - So what should Rooza Bank do? What 46:01 - Policy should raise a bank implement 46:04 - to get the 46:18 - Economic. 46:20 - Back, two, three. 46:24 - full employment. 46:26 - Okay, so we need to basically 46:30 - decrease AD. 46:34 - Okay, that means that there is a need to decrease inflation 46:36 - That means we need to 46:42 - decrease aggregate demand. 46:44 - So what should Reserve Bank do? 46:48 - Reserve, bang shirt 46:50 - Implement. 46:53 - contract. So we need to decrease things. So we need to control it. 46:55 - Okay, so we need to contract 47:00 - So contractionary monetary policy 47:02 - That means in this case, you will need to 47:06 - increase the cash rate. 47:09 - or the interest rate. 47:12 - What happens then? See? 47:16 - I and your NX. 47:18 - will decrease. 47:23 - So as a result of that. 47:25 - aggregate demand will decrease 47:27 - and shave to... 47:30 - Okay, so what happens now as Reserve Bank implement contractionary policy 47:38 - your ad curve will just shift back to the left 47:45 - What happens? We are able to get the economy back to full employment. 47:49 - And we\'re able to reduce the price level. 47:53 - Okay, so you know me before that. 47:57 - It would have been at this point and we want to get back to foreign clone. So we always use the policy 48:00 - to get it back to full employment. So this is where you need to be very, very careful 48:05 - When you are selecting the correct diagram. 48:12 - So that means whenever we\'re implementing a policy 48:17 - And again, we needed to get back. 48:21 - to full employment. That means we need your AD to shift 48:25 - back to where the three curves are intersecting. 48:29 - all right so this is what the contractionary monetary policy diagram will be 48:34 - Where we would have been here. 48:40 - we would have then decreased it. 48:43 - And get to the point B. So point A is a short run equilibrium. 48:45 - So we want to contract and get it to point B. 48:50 - So that\'s your contractionary monetary policy. 48:54 - Okay, so here with high interest rates 49:00 - an Excel form. 49:04 - Investment move forward. 49:06 - consumption of form, AED will fall, real GDP will then fall. 49:08 - okay and with expansionary monetary policy, as I\'ve explained earlier on 49:13 - This is when economy is contracting or in a recession. So we need economy to grow 49:19 - So by basically lowering interest rates, C-I-N-X will increase 49:26 - As I\'ve explained here and then basically AD will increase and shift to the right. 49:32 - So the process here is basically 49:39 - Reserve Bank, changing the cash rate, which flows down to the interest rates 49:42 - Okay, then how it affects c i and x 49:47 - how it would then affect your AD and also what\'s the impact on the real GDP and the price level. 49:50 - All right. Does anyone have any question? 50:01 - Is everyone good with monetary policy? 50:04 - Any questions, anyone? 50:11 - Okay, so... 50:14 - Just to quickly go back to monetary policy on the first slide here. So remember here 50:17 - This is implemented by a central bank okay two types and other thing as you would have noticed by now 50:23 - Okay, that it will actually only shave your ad account 50:30 - Okay, so whenever we implement monetary policy, this will shift. 50:37 - To A, D. 50:43 - It will not shift SRAS curve. So whenever the question is on monetary policy or even fiscal policy. 50:46 - aka it is actually shifting the AD car. 50:53 - Okay, so when we expand monetary policy 51:04 - All right. Yes. Your price level will go up 51:09 - So remember our target inflation rate, we want it to be 2% to 3%. What happens if your inflation 51:12 - Okay, is... 51:19 - 1%. 51:21 - Okay, so without the policy, we were at point A 51:24 - That means economic is actually not really growing because people are not spending. That\'s why prices are not going up. 51:28 - Okay, so this is where we say, okay, looking at low prices seems to be good. But if you think about it, why prices are not increasing 51:34 - It\'s because people are not spending. 51:43 - If people are not spending, economy is not going to grow because if people are not spending, firms, businesses. 51:46 - do not have to employ so many workers. 51:52 - All right, so that is where 51:54 - In this case, even though it\'s showing that price level will go up, at least it\'s going up to about our 2% to 3% target rate. Does that make sense, Harry? 51:56 - Yes, that makes sense. Basically what you\'re saying is 52:07 - Although on the surface low prices may seem like a good thing, it\'s not actually a good thing. 52:12 - Because the economy. 52:15 - No, no. Because if you think about it, I\'m not sure if I mentioned this during COVID, we had a negative, we had a deflation, a negative 0.3% inflation. 52:16 - right but basically you can see that people were not spending. So that means this okay creates high unemployment 52:26 - So this is where the government, even though we say to achieve the goal of full employment, low inflation, economic growth, it seems very easy to all of us. 52:34 - But if you think about it now. 52:42 - to balance the inflation to be about 2% to 3% and to balance for employment, it\'s not an easy role, okay? If your unemployment is basically 52:45 - very low. People are not going to be spending okay or if your inflation is very high, that could also affect your unemployment as well. So this is where when you go on to 52:59 - macroeconomics okay if you go into more in depth of macroeconomics, that\'s where you will look at inflation and unemployment, what we call your Phillips curve. 53:13 - Okay, but we are not going to look at that in our course. 53:24 - All right. Is everyone good? 53:29 - Does anyone have any question? 53:31 - All right, so a good hint that I\'m going to give you now is please make sure you\'re known 53:37 - monetary policy well, because it will definitely be a question in the exam. 53:42 - All right, let\'s take a quick five minute break. 53:48 - Okay, so be back in five minutes and then we can talk about the next policy, which is on fiscal policy. So be back in five minutes. 53:52 - Um... 54:03 - Okay, Mac, you might want to just watch the recording, okay, because I can\'t just be scrolling it for you. So if you want that whole stretch of it, yeah. 54:10 - Slides 16 and 23. Okay, slide 16. 54:20 - And 23. 54:30 - All right, so if you guys miss anything, just watch the recording. You can then stop pause there. 54:35 - Okay, and take the notes. 54:40 - All right, so everyone be back in five minutes. 54:43 - Yeah. 55:39 - threw on the ground. 55:44 - Okay, is everyone back? 58:58 - I know I\'m back. 59:05 - Only two people have acted. The rest of you, are you back. 59:22 - Everyone knows. Yes, yes. 59:32 - Thank you. 59:36 - All right, so the last bit of discuss. 59:40 - So now we\'re looking at a different policy okay but idea wise, when we\'re going to implement that is exactly the same as with monetary policy okay so this here is referring to 59:46 - fiscal policy. So what is the difference 1:00:02 - between fiscal policy and monetary policy. 1:00:05 - So fiscal policy 1:00:10 - Okay, so in this case here. 1:00:14 - Oops. 1:00:16 - This is basically implemented 1:00:21 - by definition. 1:00:27 - Okay, so F. 1:00:33 - That\'s one way to remember F would be a federal government. 1:00:35 - So when we talk about 1:00:39 - Monetary policy earlier on, that\'s money, money is a bank. 1:00:42 - Okay, so that\'s one way. 1:00:46 - Oh, have I opened the slides? Oh, sorry. Thanks. I probably have no 1:00:48 - Sorry, guys. Thank you, RZA, for letting me know. 1:00:53 - All right, start again. 1:00:57 - Okay, so we\'re talking about fiscal policy 1:01:00 - Okay, so what is the difference between fiscal policy, monetary policy? Fiscal policies 1:01:05 - implemented by the federal government so f 1:01:12 - with it starting with F. 1:01:16 - It\'s by the federal government. Let me talk about monetary policy, money. Money is the bank. That\'s how one way 1:01:18 - you can try and remember that. So this is implemented by the federal government and basically in this case, it involves 1:01:25 - Changing. 1:01:36 - basically yeah it involves changing either tax rates 1:01:38 - Okay, taxes that we pay. 1:01:45 - and or government 1:01:48 - spending. 1:01:51 - government spending. 1:01:55 - Okay, so this is different 1:01:58 - Okay, Reserve Bank and the federal government, they\'re basically separate bodies. They are not by the same people. 1:02:01 - All right, so in this case here. 1:02:08 - Here, they actually involve changing tax rates and or the government spending. 1:02:11 - Now, in this case here, as we say, your changes in the federal taxes, again, purchases and once again 1:02:19 - the same three macroeconomics. We want full employment. 1:02:27 - we want price stability. 1:02:33 - And we want economic growth. 1:02:36 - So the idea of using this policy is exactly to achieve 1:02:39 - The same goals as monetary policy. 1:02:45 - Okay, so as I said earlier on, this is by the federal government. 1:02:50 - Okay, so federal government that basically affects everyone in Australia. 1:02:55 - Okay, now don\'t confuse with state 1:03:01 - territory or local governments okay so 1:03:04 - every different state in Australia. We have different state 1:03:07 - Texas, that is not a form of fiscal policy. So when we talk about fiscal policy, it is by the federal government that affects everyone in Australia. 1:03:11 - Okay, the state government will only affect people in that state or only people in that territory. That is not a fiscal policy. 1:03:21 - All right. Now, with fiscal policy, as we say, it\'s a changing of tax rates and or government spending, there is what we also call your automatic stabilizer. 1:03:32 - Automatic stabilizer basically 1:03:44 - happens automatically. 1:03:48 - Okay, so for example, we talk about transfer payments 1:03:51 - So for example. 1:03:55 - If the economy is in a recession, during a recession. 1:03:57 - What is going to happen automatically? 1:04:03 - During a recession, we say. 1:04:08 - on employment. 1:04:12 - Yes. 1:04:14 - So now in Australia, the government 1:04:16 - can provide handouts. Your social security payment 1:04:19 - Okay, to help people um 1:04:23 - that don\'t have work, that\'s actively shown you that you\'ve been looking for a job but you can\'t find one. So when unemployment is high, what happens? 1:04:26 - More people. 1:04:35 - will rely on the government for hannah 1:04:42 - So that means automatically 1:04:50 - government spending. 1:04:56 - phone transfer payments 1:04:59 - will once. 1:05:04 - okay so because more people are basically 1:05:06 - Out of what? 1:05:10 - So they will need to depend on more 1:05:13 - government hannah. So let\'s say when the economy was doing very well 1:05:16 - only 100 people was unemployed. 1:05:21 - But what happens now during a recession 1:05:25 - let\'s say now number of unemployed is now 120. 1:05:28 - So instead of just concert payments to 100 people, now there\'s extra 20 people that the government needs to provide transfer payments. 1:05:33 - Okay, so we say automatically during a 1:05:42 - recession okay transfer payments will rise 1:05:47 - All right, that is during a recession. 1:05:54 - Now, what about the government collect tax revenue? 1:05:57 - Okay, so tax revenue 1:06:02 - that government collects 1:06:05 - will automatically 1:06:09 - decrease because there\'s less people paying taxes now, right? So previously, only 100 people were not paying taxes because they were not working. But now we\'ve got additional 20 people that was previously working and contributing income tax. 1:06:15 - to the government, now the government will be collecting less tax revenue. 1:06:30 - So that means we say during a recession, what happens? Government spending 1:06:35 - tends to be more than the tax revenue collected. 1:06:42 - Okay, so automatically 1:06:50 - this is going to happen. 1:06:52 - negate during a recession. 1:06:54 - Now, what happens during an expansion? 1:06:57 - during and expansion. 1:07:02 - Update Konomi, unemployment will now be 1:07:05 - No. Right. So during an expansion of the economic remember 1:07:09 - economy is growing, firms will have to produce more and firms have to produce more, they will need to employ more workers. So unemployment is lower now. 1:07:13 - That means now less people. 1:07:24 - will rely on the government. 1:07:27 - for transfer payments because now more people are working so automatically spending 1:07:29 - government spending on transfer payment. 1:07:36 - will basically fall. 1:07:38 - Okay, so instead of so let\'s say during an expansion 1:07:41 - So previously, 100 people was depending on the government 1:07:47 - And for her notes, now during expansion. 1:07:51 - what happens now? Let\'s say no unemployment has dropped to 70. So 30 people are less, depending on government transfer payments. 1:07:55 - So why is the tax revenue? The tax revenue government collect will now increase because more people are working 1:08:05 - That means more people are contributing 1:08:13 - Okay, to paying taxes to the government. 1:08:18 - So automatically all this will happen. The government does not have to do anything. It automatically happens. 1:08:22 - So we said during an expansion. 1:08:28 - Government spending will tend to be less 1:08:31 - Then the tax revenue collected. 1:08:35 - okay so this in this case, the government does not have to 1:08:39 - you don\'t do anything. It basically happens automatically. That\'s what we call automatic 1:08:42 - stabilizer. 1:08:48 - Now, however, what we want is on discretionary 1:08:51 - discretionary fiscal policy is whereby the government has to take the action. 1:08:56 - okay they will have to take the action to either change the spending 1:09:03 - or to increase or decrease the tax rates 1:09:07 - that people are paid. So they have to actively take the action. That\'s what a discretionary fiscal policy is. 1:09:12 - All right, so once again, we can then look at 1:09:20 - expansionary. 1:09:26 - fiscal policy. 1:09:29 - So when will the government implement this? So as the name suggests. 1:09:31 - when there is the need 1:09:40 - to expand the economy so that was basically the same as when we talk about your monetary policy so expansionary fiscal policy, basically the same thing 1:09:42 - So here, going to look at the expansionary fiscal policy 1:09:59 - The same idea. We can use expansionary fiscal policy when there\'s a need to expand economy 1:10:04 - or in other words. 1:10:11 - there is a need to increase aggregate demand. 1:10:13 - Okay, when economy is in a recession or high unemployment. 1:10:17 - So what should the government do? 1:10:21 - The government. 1:10:25 - should in this case, what should they do with, remember, fiscal policy involves 1:10:27 - changing your tax rates and or spending. 1:10:33 - So what should government do? 1:10:38 - with tax rates. 1:10:41 - The government should basically, in this case, if you want people to be spending 1:10:43 - You want to encourage people to spend. We want them to have more money for spending. 1:10:48 - So the government should decrease 1:10:53 - tax rates. 1:10:55 - okay so let\'s say previously 1:10:57 - when i earn... 1:11:00 - \$1,000. 1:11:03 - And I have to pay, let\'s say the government says every \$1,000, I have to pay a hundred dollars of tax. 1:11:05 - That means at the end of the day. 1:11:11 - I would have \$900 for spending. 1:11:13 - Okay, but now let\'s say I\'m still earning \$1,000. 1:11:16 - But the government says. 1:11:21 - now you only need to pay \$50 of tax. 1:11:23 - So if I pay less taxes. 1:11:28 - Where? More money. 1:11:31 - for spending okay so when we need to encourage people to spend, we need to make sure that people have got more money. So the government decreased their tax rates that they have to pay, what happens 1:11:34 - This will basically lead to an increase in this possible 1:11:46 - This is your income. 1:11:52 - After paying taxes. 1:11:55 - So now people have got more money for spending 1:11:58 - Wapets, C. 1:12:02 - And I. Well. 1:12:04 - CNI increases AD. 1:12:08 - will increase. 1:12:12 - Okay, so that\'s one way. So by dropping taxes 1:12:16 - people will have more money 1:12:19 - Okay, for spending. 1:12:23 - The CNI will increase. Now, what should government do with the government spending? Government will need to increase your government spending, government purchases. 1:12:26 - Okay, so remember this is your G component of AD. 1:12:41 - By increasing that, AD will increase 1:12:45 - And two. 1:12:50 - Yeah. 1:12:52 - All right, so once again here, this policy is to shift your AD. 1:12:55 - So let\'s just clear this up a little bit. 1:13:01 - So using an AD equation 1:13:12 - So this is where it\'s very, very important you remember your AD equation. Your AD equation is very, very handy in macroeconomics. So your aggregate demand, as we say. 1:13:14 - is you see? 1:13:27 - I, E, N, D, X. 1:13:31 - Okay, so basically we need to increase the ad 1:13:35 - We need this to increase. 1:13:39 - So if the government drops the taxes 1:13:42 - then you see 1:13:48 - will increase 1:13:50 - and your eye 1:13:52 - will increase you\'ve got more money for spending. 1:13:54 - And at the same time, if the government increased their spending 1:13:57 - okay either the government builds more highway, railroads, hospitals, right? So if the government increases spending 1:14:02 - Okay, your AED will increase and shift to the right 1:14:10 - Now, with the government spending that also could increase could be your transfer payments. 1:14:15 - Okay, now during, I\'m not sure how many of you were here during covet 1:14:22 - But those that were in Australia and was actually working when we all went for a lockdown during COVID, government were giving out what we call your job seeker payment and job keeper payment. 1:14:28 - All those wire transfer payments. 1:14:43 - Okay, now transfer payments 1:14:45 - Remember, the government gives money out to households. Households can then use this for spending. So your C will basically increase. 1:14:48 - So with expansionary we say 1:14:57 - G, government should increase the spending. 1:15:00 - Okay, either they built more hospitals and railroads and highways and things like that, aka increased the spending, increased transfer payments, or we basically 1:15:03 - drop the tax rates. 1:15:15 - Okay, so that means in this case here 1:15:17 - The diagram-wise is exactly the same. 1:15:22 - So let\'s say 1:15:26 - Okay, initially. 1:15:29 - economy was at point z long run equilibrium. 1:15:32 - As a result of COVID, 1:15:36 - what happens? 1:15:39 - AD would have decreased 1:15:41 - and shifted to point A. 1:15:43 - Okay, so at point a 1:15:45 - you can basically see 1:15:48 - Prices level has gone down however 1:15:50 - Your real GDP? 1:15:54 - is now less than potential GDP. So economy is in a recession 1:15:57 - high unemployment. 1:16:03 - How do we get back to this point? What do we do to get back to this point? 1:16:05 - This is where the federal government needs to use expansionary policy to shift 1:16:11 - the ad curve 1:16:18 - from 81 to 82 so idea wise is exactly the same 1:16:21 - As we looked at your monetary policy earlier on so let me quickly show you. 1:16:27 - monetary policy. 1:16:33 - that we looked at earlier on. 1:16:37 - Okay, so when the economy initially a long run equilibrium 1:16:39 - okay and in this case, following consumer confidence 1:16:43 - We get the same result in the short run. 1:16:47 - Okay, and in this case, we can then increase this plan. 1:16:50 - using expansionary monetary policy. 1:16:54 - Or we can use expansionary fiscal policy. 1:16:58 - Okay, so with the expansionary fiscal policy as we say 1:17:03 - the government will need to increase the spending so that the G component increases 1:17:08 - or we decrease the tax rates. So your CNI will increase 1:17:14 - or the government gives up transfer payments. Increased transfer payments, and your C can increase. 1:17:18 - So the goal 1:17:25 - of expansionary fiscal policy is to shift your AD curve to the right to get to full employment. 1:17:27 - Now, then we can also have 1:17:34 - Okay, contractionary. So let\'s now look at 1:17:39 - Contractionary. 1:17:43 - fiscal policy. 1:17:47 - So the same idea as we did with monetary policy. 1:17:52 - When will contractionary policy be implemented? 1:17:57 - So when we need to contract economy. 1:18:02 - Okay, we need to reduce things 1:18:05 - Okay, so the same idea with your monetary policy. 1:18:10 - Okay, so when we need to decrease AD, when economy is faced with high inflation. So here we say contractionary because we need AD to decrease. 1:18:16 - So think about your AD equation. 1:18:30 - So AD, C. 1:18:34 - All right. Jeannie. 1:18:38 - and your index. So we need AD to fall. 1:18:40 - That means we need to do something for c 1:18:46 - I-N-G-G24. 1:18:49 - So with government spending, government spending, they should cut down their spending. 1:18:52 - And basically for c and i want you to go and do with Texas? 1:18:57 - increase the tax rates. So now I have to pay more 1:19:02 - still on this all slight, this slide is an R. 1:19:07 - Why didn\'t it change? 1:19:10 - Sorry, guys. 1:19:13 - All right, so with contractionary, we need to contract 1:19:18 - Okay, the economic, we need AD to decrease. That means in this case here, the same idea. So you\'ve got the equation AD is a C, I, G, and NX. 1:19:24 - So we need AD to fall. 1:19:35 - Okay, so that means we need to think 1:19:38 - going to sting how do I get people to spend less money? 1:19:42 - If I increase taxes to pay me more money, then they\'ve got less money for spending. So by increasing tax rates, see. 1:19:46 - And I will fall. 1:19:55 - And at the same time, if the government cuts their spending. 1:19:57 - And also cuts the transfer payments, which is very unlikely to happen. 1:20:00 - Okay, so basically your AD will then decrease 1:20:05 - And we are able to get to the full employment. So here, for example. 1:20:10 - Okay, so... 1:20:18 - Initially, economy was at long-run equilibra. 1:20:20 - Okay, and remember with an increase in aggregate demand, what happens 1:20:23 - price level would have gone up. 1:20:29 - we would now have high inflation because we\'ve gone beyond full employment. 1:20:32 - So how do we bring the economy back? So from, let\'s say 1:20:37 - initially at point a 1:20:41 - you have gone to point B. 1:20:44 - How do we bring it back to full employment? Remember, we always wanted to be at full employment. 1:20:46 - So how do we bring it back to full employment? We need to contract it. We need AD to decrease. Shift your AD curve from AD1 back to 82. So to contract. 1:20:52 - We basically need to increase tax rates 1:21:04 - cut government spending, cut transfer payments. 1:21:08 - All right, so that would be your contractionary policy. 1:21:13 - Okay, so here the problem if we have 1:21:18 - economics contracting or recession, we always use an expansionary policy 1:21:23 - if there\'s high inflation, we will use contractionary. So that would be your fiscal policy there. 1:21:28 - That\'s basically it. 1:21:37 - Anyone have any question? 1:21:39 - All right, is everyone good? 1:21:48 - No question. 1:21:52 - Okay, so if you haven\'t got any question 1:21:57 - Thank you very much, everyone. 1:22:00 - Select number 16. 1:22:04 - So thank you very much, everyone, for joining me every Monday. 1:22:06 - morning for the lectures. I know numbers have dropped. 1:22:12 - But hopefully people are watching the recording. So if you think that you missed out anything 1:22:15 - Please, okay, go back and watch the lecture recording again all right if you\'ve got any questions, feel free to email me or even email your tutor. They should be able to answer any queries you have. So please don\'t forget 1:22:22 - you\'ve got one online test due this sunday 1:22:39 - Okay, if those have not done the RP now, please get that done. 1:22:43 - And also those have not submitted a case study, but they please do that because it\'s 18%. Every mark counts okay and then um next monday same time. 1:22:48 - Same Zoom link. I will be running an exam workshop. 1:23:01 - All right, so if you haven\'t got any question, have a lovely, lovely day. I think it\'s pretty hot out there. 1:23:06 - Okay, I\'ll see some of you tomorrow evening in online tutorial or Wednesday morning and the rest of you, I\'ll see you one last time next Monday. 1:23:13 - All right, so yes, Harry.