Monetary and Fiscal Policy

The Australian Government plays an important role in stabilizing the economy and sustaining economic growth, as economic growth fluctuates from year to year, following a boom and bust cycle. The government adopts macroeconomic policies to influence the rate of economic growth. In the short to midterm, macroeconomic policies aim to affect the growth rate through aggregate demand, smoothing fluctuations and achieving the highest level of growth the economy can maintain. Fiscal and Monetary policy are important government instruments that have been used to stabilize the economy in recent years.
Monetary Policy is implemented through domestic market operations. It involves the Reserve Bank of Australia (RBA) influencing the level of interest rates in the economy by buying and selling government securities which in turn affect interest rates, the cash rate in the economy and overall economic growth. Depending on whether the government wants to increase or decrease growth, different measures can be taken. The main objectives of Monetary Policy include: price stability, full employment and economic growth.
In recent years, the Australian government has experienced differing interest rate cycles and Monetary Policy has been effective in maintaining inflation between the targets of 2-3%, averaging 2.7% since it was introduced in 1993.
From May 2002 to March 2008, Australia experienced a high interest rate cycle, where the RBA raised the cash rate by 1% during 2002-2003 due to a housing boom and increasing household debt, which caused higher inflation. In response to the previous recession in Sep 2001 to December 2001, a contractionary stance of monetary policy was used, primarily to return to normal growth rates and reduce inflation and end the housing boom. The contractionary stance of monetary policy promoted a slowdown in economic activity, causing pressure on interest rates, which primarily reduced the demand for money and dampened spending. Although...