Promoting Policies and Macroeconomic Stability †Free Samples

Question: Discuss about the Promoting Policies and Macroeconomic Stability. Answer: Introduction The aim of this paper is to discuss about the stable equilibrium in the economy in both microeconomic and macroeconomic concept. Equilibrium is termed as stable if the returns to the initial equilibrium position through process of counteracting forces as it are deviated from equilibrium point due to external disturbances. According to the stable equilibrium of Marshall, disturbance in equilibrium quantity occurs. On the other hand, disturbance in equilibrium price occurs in Walrasian stable equilibrium concept (Dierker, 2012). In both circumstances, the position of equilibrium is restored. The paper also highlights on the determination of existence of stable equilibrium in the Australian economy. The study also recognizes the necessity of government intervention when external shocks deviates the economy from stable equilibrium position. Stability in economic equilibrium can be explained by both macroeconomic and microeconomic stability. Microeconomic stability in the economy is discussed with the help of market equilibrium shown in the figure below. This figure shows that the market equilibrium occurs at the intersection point between the demand curve (DD) as well as the supply curve (SS) (Rader, 2014). Now, owing to some disturbance, the price of a commodity rises to OP0 corresponding to which the quantity demanded is OQ0 and quantity supplied is OQ0 (Sutherland and Hoeller, 2012). However, as OQ0 exceeds OQ0, it outcomes in excess supply that is shown by Q0Q0. As the objective of the seller is to maximize profit, they would decrease production. Thus, price falls and ultimately reaches the initial point OP ** owing to competition among the retailers. In addition, if the price of a commodity falls to OP1 owing to disturbance , then the quantity demanded (OQ1) exceeds quantity supplied (OQ1) that results in excess demand. However, the seller increases the price of that particular commodity , which again shifts the price level to OP**. This highlights stable market equilibrium in free market. Economic stability in macroeconomic terms is defined by AD-AS (aggregate demand and aggregate supply) model. However, economic stability occurs when the AD curve intersects with the AS curve. This macroeconomic stability acts as shield against exposure to fluctuations in currency and interest rate in worldwide market. High fluctuation in currency, debt burdens and price leads to economic crisis and downfall in GDP of the nation (Creel, et al., 2015). Additionally, the government adopts monetary as well as budgetary policy for stabilizing inflation and hence proper public finances leads to long term economic growth. These policies help the economy to recover from bad phase and hence there occurs trade off. Determining whether stable equilibrium exists in the Australian economy As Australia has been known as mixed market economy, the decisions regarding production and distribution are taken with the help of government intervention. The current state of the Australian economy reflects that the economy is in stable equilibrium (Sangnier, 2013). The macroeconomic indicators including GDP, consumer price index (CPI), total employment, strength of the currency, interest rates and trade balance helps in appraising the stability for increasing growth of the economy. The main aim of the Australian government is to sustain economic growth by retaining low inflation and limiting debts as well as liabilities (Borio, 2012). Moreover, the government tries to intervene in the business as the fluctuation in business cycle impacts on the GDP of the economy. Australian government adopts macroeconomic policy for controlling price level as it linked with stability as well as growth of the economy. In this study, inflation rate and GDP is considered for illustrating the existe nce of stable equilibrium in the Australian economy. The GDP of the Australia has been stable over the recent period which reflects that there has been slight fluctuation in consumer spending, government expenditure, investment in business and balance of trade. Though there has been slight variation in GDP of the economy, it did not influence the stability of the economy. The Australian government tries to keep inflation rate low by implementing proper monetary policy. Recent study reflects that the inflation rate in this economy has been recorded within the target rate, which is 2-3% set by the Reserve Bank of Australia (RBA). The figure below shows stable inflation rate in Australia. Australian government restores economic stability by adopting monetary as well as fiscal policies (Angeli et al., 2012). They implements fiscal policies by using budgetary process and enhance the nation by running deficit budget. On the other hand, they also implements monetary policy through operations in the market that in turn affects the rates of interest. Thus, they keeps the interest rate low for stabilizing the economy. The two instruments that are devised by the Australian government for stabilizing the economy are Automatic stabilizers and Discretionary stabilizers. As automatic stabilizers affects the aggregate demand in countercyclical way, the government adjust budget by over viewing on the current economic phase (Agnor and Pereira da Silva, 2012). This tool includes tax receipts such as PAYTG tax, GST etc. On the contrary, discretionary stabilizer involves reforms in tax structure, government expenditure and in other sectors. It requires budget reforms that in turn influence aggregate demand and stability in the economy. For example, Appreciation of Australian dollar in mining boom in relation to other currencies helped in stabilizing inflationary pressures and ensures that Australian economy receive price signals for facilitating resource flow. It also benefits the mining boom by raising purchasing power of the households of Australia. Conclusion It can be concluded from this assignment that stable equilibrium exists in the Australian economy over the last few years. The Australian government intervenes for stabilizing the economy by implementing different stabilizing instruments. Hence, intervention of the Australian government is required for making economy stable as it topples during the phases of business cycles. References Agnor, P. R., Pereira da Silva, L. A. (2012). Macroeconomic stability, financial stability, and monetary policy rules.International Finance,15(2), 205-224. Angeli, D., Amrit, R., Rawlings, J. B. (2012). On average performance and stability of economic model predictive control.IEEE transactions on automatic control,57(7), 1615-1626. Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt?.Journal of Banking Finance,45, 182-198. Creel, J., Hubert, P., Labondance, F. (2015). Financial stability and economic performance.Economic Modelling,48, 25-40. Dierker, E. (2012).Topological methods in Walrasian economics(Vol. 92). Springer Science Business Media. Rader, T. (2014).Theory of general economic equilibrium. Academic Press. Sangnier, M. (2013). Does trust favor macroeconomic stability?.Journal of Comparative Economics,41(3), 653-668. Sutherland, D., Hoeller, P. (2013). Growth-promoting policies and macroeconomic stability.