Inflation, Aggregate Demand & Supply, Money and Monetary Policy – Fiscal Policy Essay Example

Submission date

Economic Principles

CPI for 2012= Current year expenditures/base year expendituresx100.

1232/1726= 71.4. The CPI for 2012 is 71.4.

The consumer price index is described as a weighted index of goods purchased by consumers. The CPI constitutes a measure of price change from designated base year to current year. The limitations for CPI is that it does not provide an index for measuring the production or consumption of the economy. The CPI is considered as flawed when it comes to economic measurement.

When there is a decline in wealth, a situation associated with inflation pressures, the AD/AS diagram shows fluctuation in the short run. Reducing wealth is caused by high inflation rate that occurs immediately after an economic boom. With the reduction of wealth, the AD/AS diagram is impacted in two ways. The aggregate demand continues to shift to the right. This suggests that there is full employment that pushes macroeconomic equilibrium into the steep portion of the aggregate supply curve. When the aggregate demand shifts to the right, the new equilibrium designated as E1 fall within a higher price level as compared to the equilibrium E0.

Figure 1: The AD/AS diagram.

One of the microeconomic impacts on Harvey Norman is the element of product elasticity. Product elasticity is a micro-economic analysis that affect demand of the product. The example of products that have shown elasticity are the electronic products. In previous years domestic purchase of new electronic appliances were seen as a luxury for most of the buyers. Today, electronic products including TVs are insatiable to the consumers. The reasons for the change of demand of electronic products include retail price deflation of most of the electronic products, change in prevalence of the purpose of the electronic products such from a luxury to a necessity. The deflation of foreign currencies also affect the electronic product sales. Product elasticity means that consumers can live without expensive electronics, but can find alternative affordable products. The market structure that Harvey Norman use is monopolistic competition that has differentiated products that bring the company normal long term profits.

Consumer confidence is important for any economy. Consumer confident also measures how confident people are with their income stability. The consumer confident impacts economic decisions including spending. Consumer confidence decrease when there are economic problems such as inflation and increase when the economy is healthy. With regard to normal growth trends and scenario, Harvey Norman uses consumer assessments to plan for their actions because weak consumer confidence indicates a decline in consumer spending hence the need for the company to reduce its inventory. On the other hand, if consumer confidence is improving the company begins introducing new premium products to the market.

The zero level of investment in new Harvey Norman stores and the lower/patchy sales growth occurs in stages of business expansion. Harvey Norman relies more than the local market for expansion and the company looks for opportunities in foreign markets. The local markets maybe having slow growth, but the foreign markets might be experiencing high growth. Therefore, with different market growth processes, in different markets, Harvey Norman creates a zero investment in slow markets in favor of positive investment in markets that are moving sales. We should be careful about using Harvey Norman’s sales growth as the only source of information to determine if Australia is in a period of slow growth because the company’s deals with one line of products that are considered a luxury as compare to dealing with basic goods and services that consumers cannot avoid buying (Low). Also, Harvey Norman does not change the way it makes its finance and market reporting hence these reports do not represent the general market status.

Monetary policy affect the share market through liquidity, impact on economy and valuation. When the central reserve announce changes in monetary policies, there is always a general trend in short term gush of the liquidity inflow and outflow within the share market. The inflow and outflow gush in liquidity is often caused by Foreign Institutional Investors who must respond to the policy to favor their investments and get good returns. The Foreign Institutional Investors (FIIs) can park their funds with ETFs or develop market instruments that will minimize the interests they are paying when they are doing their business.

Developed economies have unemployment benefits programs that are aimed at protecting workers against major income losses that arise during the unemployment spell. The unemployed workers are required to meet their basic consumption needs. If the government stand in to protect the unemployed, the government is doing so in order to protect the workers from having to sell their assets and avoid accepting that are below their qualifications. These programs also assist the country through stabilizing the economy during recession. However, these programs should not be too generous because they will lengthen the unemployment and raise the unemployment rate. Therefore, the purpose of these programs is to protect workers and minimize undesirable side effects of unemployment.

When the economy has moved from A to B, the most appropriate fiscal policy that will achieve potential GDP is increase in government spending. The government enables changes of fiscal policy to increase government spending through increasing taxes and changing government spending in various sectors. For example, fiscal stimulus is created through debt creation channel that improve availability for loan products. The government can spend money to subsidize aggregate demand for goods and services that increase investment in the corporate world.

The government revenue is based on tax collection. When the economy is good and when there is low unemployment, the government has surplus due to the revenue collection from businesses and workers. When there is low unemployment there is increased consumption, there is increased demand of goods and services and increased employments hence increasing revenue for the consumers and the government. To bring the economy from point A to B, the government budget is likely to increase in order to finance the expansion of the monetary policy.

The underlying causes of stronger than expected inflation rate in Australian included market dealers that created odds of interest rate that were shortened dramatically. The prices of the competitive markets in fuel categories increased dramatically by 10 percent while the prices of fruits increased by 11%. The seasonal and volatile fruit and fuel markets were responsible for high price inflation rates. The goods that experienced a fall in price included electronic products that were considered digital products that continued to disrupt traditional business models. Utility prices such as health insurance rates and wage rates took part in controlling inflation because they lowered the prices. A rise in the fuel prices will influence the CPI, because the CPI is determined by disposable income regardless of the price of the products.

A lower Australian dollar helps exporters due to cheaper goods with regard to exports. A low dollar is advantageous to exporters because they will pay for low price of exports. Also, the low dollar will cause a pay cut among workers and imports will be priced.

The changes in price when the dollar is a risk factor for inflation and if inflation sets in the country, the RBA will develop a monetary policy that will with increase taxes. The influence of increasing taxes will lower jobs and create unemployment, but increased product and services prices and with low disposable consumer income hence slowing economic growth.

Works Cited

Low Catie. Blistering conditions turn around Harvey Norman’s sales trend. 2017. Web.