Guidelines for Monetary Policy Meeting
Imagine that a monetary policy meeting for your country is being held in your tutorial in week 12.
Your job is to work with your group to come up with a recommendation for what your country´s
central bank should do at this meeting. Using these guidelines, you can understand what will be
expected of your group for this meeting.
For the meeting, your group needs to decide what you believe the central bank in your country
should do in terms of its monetary policy instrument (for example, in Australia, the cash rate). Your
group should decide on a policy recommendation, supporting your recommendations with a
ief
summary of the data and economic trends that led to your recommendation based on what you
have learnt.
There are three tasks for this assignment.
As a group, you need to develop a video presentation. The video presentations will be shown during
your week 12 tutorial. It should take 3-5 minutes and can be in any format that you believe would
est deliver your recommendation. In your video, your group should summarize the main points of
your group reports, placing particular emphasis on the reasons of your policy decisions. The video is
worth 4/10 marks for this assessment.
As a group, you need to develop a no more than three-page (excluding cover page, graphs/tables
and references) report. Your group needs to prepare answers to ALL parts based on you and your
group members’ joint effort/discussions. The group report is worth 4/10 marks for this assessment.
You also need to submit an individual report. Your individual report should be no more than 400
words in length. Your report shall address your own answers for all questions on the ilearn
document – Teamwork task process. The individual report is worth 2/10 marks for this assessment.
In week 12, when all the videos have been presented, students will be given the opportunity to vote
for what they believe was the most creative video presentation. The purpose of this is to encourage
creativity and professionalism in the video assignments. Good luck!
Your group report and video are due by 11:59pm of the Sunday of week 11 (28th Oct), at the
meantime, EACH person must submit their individual teamwork report. This is a firm deadline,
though if you submit your presentation later, you will suffer a penalty of 10% for every 24 hours up to
a maximum of 72 hours after the deadline. Exceptions will be granted for cases in which an
application for Special Consideration is made and approved.
Note: you can let your tutor know by addressing the issue in the individual report if there are any
people in your group who are not contributing in any way. No complaints are to be made in any
other ways. If possible, please do your best to inform us about these issues as early as reasonably
possible.
Structure:
You should structure your report and presentation based on the following parts.
Part 1: Background knowledge: what is the role and objectives of the central bank in your country?
Provide a
ief overview of how your country´s central bank conducts monetary policy. Using a
graph created in a package like Excel, show and discuss how the monetary policy instrument has
changed over time starting from 1990.
Part 2: What are the cu
ent domestic conditions you think are relevant for deciding what to do with
the monetary policy instrument?
Part 3: What are the cu
ent external (foreign) conditions you think are relevant for deciding what to
do to with the monetary policy instrument?
Part 4: What is the likely impact of these conditions on the AD curve?
* Note: to decide this, you need to take all relevant factors in parts 2 and 3 into account and draw
only one shift or no change.
Part 5: What is the likely impact of these conditions on the AS curve?
* Note: to decide this, you need to take all relevant factors in parts 2 and 3 into account and draw
only one shift or no change.
Part 6: Based on the above, what do you think your country´s central bank should do and why?
Referencing
Please use Harvard referencing style using both in-text citations and a reference list. See:
http:
libguides.mq.edu.au/content.php?pid=459099&sid=3759396
adam assefa
Two Stages of developing:
There should be two main stages involved in developing your proposal:
Stage 1:
Think about the cu
ent economic data and recent trends that central bank members would use in
making a policy recommendation. The data you consider should include leading economic indicators.
At the most basic level, these would include unemployment and inflation rates and the consumer
confidence index. Better proposals would also include other indicators of the strength of aggregate
demand (such as housing and construction activity, retail sales, exports and imports, strength of
foreign economies) and of aggregate supply (such as energy costs and productivity trends).
In examining the data, you should think about what it means by itself and also how it fits in with
other data to predict movements in aggregate demand and/or aggregate supply. If, for example,
consumer confidence has decreased, you would consider this as a piece of evidence which,
alongside other trends you identify, would allow central bank members to predict what might
happen to aggregate demand in the future.
Keep in mind that this exercise involves the uncertainty of the real world. For example, if retail sales
have been unusually low but domestic investment is growing, then you need to decide what these
(opposing) events might mean for future aggregate demand. Keep in mind that there is not
necessarily one right answer. In order to make your recommendation, you should think about
whether there are more factors that indicate a shift of the AD (or AS) curve in a particular direction
or whether there are some factors that have changed more significantly than other factors.
Stage 2:
Think more closely about how the data you have collected impacts the theoretical models we have
talked about this semester (e.g. AD-AS and the IS-LM models). Then use these models to suggest
what the central bank ought to do to monetary policy at the next meeting.
For example, if you think that the AD and AS curves might move so that output falls below potential,
then you might think that the central bank should lower the interest rate with the aim of boosting
investment and consumption spending and therefore output.
AD-AS MODEL
Demand-side variables (AD curve – planned aggregate expenditure on domestic goods and
services
= domestic output)
• Household spending (C) – (consumer purchases)
• Investment spending (I) – (business purchases on new capital goods)
• Government spending (G) – (public sector purchases)
• Exports (X) – (foreign spending on domestic goods and services)
• Less imports (M) – (domestic spending on foreign goods and services)
Examples of demand shocks leading to an injection of new spending shifting the AD curve right:
• Higher profits through better technology raising business investment
• Expansionary fiscal policy leading to higher government spending
• Higher foreign income or weaker exchange rate raising export spending by foreigners
• An increase in wealth from higher house prices or share prices raising household consumption
• A change in expectations leading to more optimism (more confidence) raising spending
Examples of demand shocks leading to a withdrawal of spending shifting the AD curve left:
• Higher savings (increased saving ratio)
• Contractionary fiscal policy leading to higher taxation (reducing household after-tax income)
• Stronger exchange rate leading to higher Imports (import spending on foreign goods and services)
• Higher interest rates raising the cost of bo
owing, reducing business investment
• An increase in pessimism (less confidence)
Movement versus shifts of the AD curve:
The above examples lead to shifts of the AD curve. Changes in the inflation rate lead to movements
along the AD curve e.g. an increase in the inflation rate tends to decrease equili
ium output (all else
eing equal).
Supply-side variables (AS curve – relationship between output gap and changes in inflation rate)
Examples of supply shocks leading to higher inflation by shifting the AS curve left:
• An increase in costs possibly also reducing potential output, caused by:
1. Higher wages (due to e.g. stronger trade unions)
2. Higher raw material prices (e.g. oil)
3. Higher commercial rents (due to inadequate building construction)
4. Falling productivity (due to e.g. reduced training and education)
• A decrease in available resources and technology possibly also reducing potential output, caused
y:
1. Innovations that make workers and machines less efficient
2. A reduction in unemployment benefits resulting in a smaller available labour pool
3. Less access to natural resources e.g. through successful campaigning
• Higher inflation expectations
Examples of supply shocks leading to lower inflation by shifting the AS curve to the right:
• A decrease in costs possibly also raising potential output, caused by:
1. Lower wages (due to e.g. more competition from a
oad – globalisation)
2. Lower raw material prices
3. Lower commercial rents
4. Improved productivity (due to better technologies)
• An increase in available resources and technology possibly also increasing potential output, caused
y:
1. Innovations that make resources e.g. workers more efficient
2. Social acceptance of more women working resulting in a larger available labour pool
3. Greater access to natural resources e.g. water bodies
• Lower inflation expectations.
Movement versus shifts of the AS curve:
The above examples lead to shifts of the AS curve. Changes in output lead to movements along the
AS curve e.g. an increase in output tends to an increase in inflation (all else being equal).
Ask yourself
1. Is the effect ‘good’ or ‘bad’?
2. Do you expect that that the effect will be ‘big’ or ‘small’, significant or insignificant?
3. How reliable are the statistics upon which the analysis is based?