Assessment A20474 - Carlos D

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Assessment A20474
Assessment 1
Q1. Explain the purpose of increasing interest rates� How does this help control high inflation?
The main goal of raising interest rates is to reduce the rate of inflation. When inflation is high, monetary policy measures like changing interest rates can be used by central banks to limit demand for goods and services, which helps to bring inflation back down to more manageable levels.
By decreasing the amount of money available for borrowing and spending, increasing interest rates can help contain inflation. People and companies are more inclined to take out loans and spend money on products and services when interest rates are low because borrowing money is made more affordable. This rise in demand may result in increased costs, which might fuel inflation.
The cost of borrowing money increases when interest rates are raised, and as a result, borrowers and companies are less inclined to take out loans and make purchases. This decline in demand may aid in easing pricing pressure and bringing inflation to more tolerable levels.
The use of interest rate rises by central banks must be timely and suitable if they are to be successful. If they raise rates too quickly, the economy may experience a severe downturn, which might have unfavorable effects like greater unemployment rates. Nevertheless, if they take too long to respond, inflation may continue to grow and become harder to manage.
To sum up, raising interest rates is one of the main strategies used by central banks to rein in rising inflation. Interest rate rises can aid in bringing inflation back down to more reasonable levels by making borrowing more expensive and limiting demand.
Q2. Explain how high-interest rates could affect the following financial markets, products and services:
Q.2.1. Banking system
Q.2.2. Stock market
Q.2.3. A person with a large amount of money in a savings account.
Q.2.1.
Financial markets, goods, and services, as well as the banking system as a whole, can all be impacted by high-interest rates. These are a few instances:
High-interest rates may cause changes in the financial markets, which may have an impact on banks and other financial institutions. For instance, investors may choose to invest in fixed-income instruments like bonds when interest rates are high, which might reduce the demand for stocks and other financial goods. This may have an effect on banks whose sources of income include trading or asset management services. High-interest rates can also raise a company's cost of capital, which could cause a decline in the value of its shares.
High-interest rates might affect the availability and cost of banks' financial goods and services. For instance, when interest rates are high, borrowing money becomes more expensive, which can reduce consumer demand for loans, mortgages, and other forms of credit. Banks that rely on revenue from lending operations may be impacted by this. Also, clients may find it more appealing to save money in interest-bearing accounts like savings accounts and CDs when interest rates are high, which might expand the selection of savings products that banks provide.
Q.2.2.
Financial markets, goods, services, and the stock market can all be impacted by high-interest rates in different ways. These are a few instances:
Financial markets: When investors turn their attention to fixed-income products like bonds, demand for stocks and other equities may decline when interest rates increase. As a result, investors may decide to sell their equities and buy fixed-income instruments with higher yields, which might have an effect on the stock market's overall performance. High-interest rates can also have an effect on the dollar's value, which can have an effect on businesses that operate internationally or rely heavily on exports.
Goods and services: High-interest rates can affect how much it costs for firms and individuals to borrow money, which can affect their capacity to make investments and expand their organizations. The demand for loans may decline as borrowing costs rise, which may have an adverse effect on banks and other financial organizations that depend on lending-related revenue. Furthermore, corporations may find it more costly to issue bonds and borrow cash through debt financing when interest rates are high.
Q.2.3.
High-interest rates can affect those who have a lot of money in savings accounts in both positive and bad ways. These are a few instances of how these people could be impacted by high-interest rates:
Financial markets: Investors looking for a steady and predictable return on their investment may find fixed-income products, such as bonds and money market accounts, to be more alluring when interest rates are high. This may enhance demand for these instruments and maybe push up their values, which would be advantageous for investors who have a lot of money stashed away in savings accounts.
Goods and services: Those having a lot of money in savings accounts and other deposit accounts may profit from a rise in interest paid on these accounts due to high-interest rates. For retirees or other people who depend on savings for their financial stability, this can be a reliable source of income.
Q.3.
In classic microeconomic theory, the concept of “The invisible hand” states that “free markets will determine equilibrium in the supply and demand for goods. This means that by following their self-interest, consumers and organizations can create an efficient allocation of resources for the whole of society without the need for intervention”.
A. Do you agree with the concept of the invisible hand? Explain your answer.
B. Do you think that increasing interest rates when trying to control inflation is
compatible with the invisible hand? Explain your answer.
A.
Yes, I agree because according to the invisible hand theory, people and businesses acting in their own self-interest will inevitably be led by market forces to create and consume goods and services in the most effective manner.
This means that without the need for government interference or central planning, the price of products and services will be set by the forces of supply and demand in a free market. In this sense, the invisible hand is viewed as a tool for advancing both personal liberty and economic efficiency.
Modern economics has benefited from the invisible hand theory, especially in the fields of microeconomics and free-market capitalism. It has been used to support legislation that supports laissez-faire economics, deregulation, and free trade.
B.
As raising interest rates to combat inflation helps the market to self-correct to find equilibrium in the supply and demand for goods and services, this action may be considered as consistent with the invisible hand idea.
In order to combat inflation, the central bank raises interest rates. This indicates to lenders and borrowers in the market that borrowing money will become more costly, which lowers demand for goods and services. As a result of the decline in demand, prices fall and the market returns to equilibrium.
The central bank does not directly control the market when it raises interest rates; rather, it is sending the market a signal so that it can rebalance itself.
This is in line with the invisible hand theory, which contends that markets are self-policing and will eventually gravitate toward an optimal distribution of resources.
The ability of interest rate changes to manage inflation has its limitations, and there may be instances in which government intervention or other policy measures are required to address market inefficiencies or advance societal welfare.
Generally, while not a flawless implementation of the invisible hand theory, the use of interest rates to curb inflation is generally accepted to be consistent with the theory's guiding tenets of market efficiency and individual liberty.
Q4. Research and discuss in your own words the concept of capital requirement (also known as capital adequacyratio). Address these points in your answer:
a. What is the meaning and importance of capital requirement (also known as capital
adequacy)?
The minimum amount of capital that financial organizations, including banks, are required to keep on hand as a safety net against unforeseen losses is known as the capital requirement. To preserve the security and stability of the financial system and to safeguard investors and depositors, regulatory bodies, such as central banks, set the capital requirement.
The benefit of capital requirements is that they operate as a safety net against possible losses that financial organizations can suffer. This implies that rather than only depending on depositor money, a bank can utilize its own capital to offset losses if they result from faulty loans or investments. By doing so, bank failures are less likely, and the financial system is shielded from systemic risks.
Capital requirements are an indication of the stability and financial health of the financial organization. In the case of unfavorable economic conditions or financial shocks, a bank with a larger level of capital is viewed as being more financially stable and less likely to fail.
Additionally, capital requirements make sure that financial organizations are encouraged to take responsible risks rather than abusing this incentive. This is due to the possibility that a bank that takes on excessive risk and experiences losses will not have enough capital to cover those losses, which could result in regulatory fines or even closure.
Overall, capital requirements are a crucial instrument for guaranteeing the stability and safety of the financial system and safeguarding investors and depositors from possible losses.
b. What is the current Australian capital adequacy ratio?
According to the Australian Prudential Regulatory Authority (APRA), as of September 2021, authorized deposit-taking institutions (ADIs) in Australia had capital adequacy ratios of 14.6%, which is higher than the required minimum of 10.5%. It is important to keep in mind that capital adequacy ratios might alter over time as the nation's financial and economic circumstances change.
Q5. Research, and explain how and how often the CPI is calculated by the Australian Bureau of Statistics (ABS).
The Australian Bureau of Statistics (ABS) determines the Consumer Price Index (CPI) on a quarterly basis, which results in its publication every three months. The CPI is calculated by the ABS using data collected from various Australian outlets totaling around 100,000 prices for about 1000 goods per quarter.
The procedure of calculating the CPI is intricate and takes into account variations in the cost of products and services that are often purchased by Australian households. Based on their percentage of household spending, the ABS gives various categories of goods and services distinct weights. For instance, the CPI basket gives shelter and food a larger weight than luxuries like jewelry or leisure activities.
After gathering pricing information for each item in the basket, the ABS determines the percentage change in prices from the previous quarter. An overall estimate of inflation for the Australian economy is produced by combining these increases and weighting them based on their proportion of household spending.
The CPI is a crucial economic indicator that helps consumers, businesses, and governments assess changes in the cost of living and make educated choices regarding inflation, interest rates, salaries, and investments.
Q6. Review Section 1.13 in your Workbook and briefly explain in your own words the role and purpose of:
a. the Australian Prudential Regulation Authority (APRA)
The prudential regulator of the Australian financial services sector is the Australian Prudential Regulation Authority (APRA). Its primary duty is to oversee financial institutions and make sure they run securely, steadily, and in compliance with all applicable laws and prudential requirements.
In Australia, APRA is in charge of regulating banks, credit unions, building societies, insurance firms, and superannuation funds. By establishing prudential rules, ensuring compliance, and taking required remedial action, it tries to keep the financial system stable.
Among APRA's specific responsibilities and duties are the following:
checking that financial institutions are in compliance with all applicable laws and prudential requirements by conducting prudential supervision
Prudentially regulating financial firms by establishing and enforcing norms
b. the Australian Securities and Investments Commission (ASIC)
Australia's financial markets and financial services are governed by the Australian Securities and Investments Commission (ASIC). To safeguard Australian consumers, investors, and creditors, it is responsible for enforcing and overseeing laws governing businesses and financial services.
ASIC's main duties and responsibilities include, among others:
Registering businesses and auditors, and regulating them
granting licenses to and overseeing financial service providers, including brokers, dealers, and investment advisors.
Ensuring adherence to rules and regulations regarding financial services
investigating violations of the law and pursuing legal action against offenders
promoting consumer education and financial literacy.
Regulating and enforcing laws pertaining to the Australian financial markets, such as the Australian Stock Exchange (ASX) and other derivatives and securities markets.
c. the Reserve Bank of Australia (RBA)
The Reserve Bank of Australia (RBA), which serves as the nation's central bank, is vital to the Australian economy. The RBA's primary duties and responsibilities include the following:
Conducting monetary policy: In order to achieve its primary goal of preserving price stability, which is typically understood as maintaining inflation within a target range of 2-3% over the medium term, the RBA establishes and executes monetary policy. In order to change the money supply and interest rates in the economy, which in turn affect economic activity, inflation, and employment levels, the RBA modifies the official cash rate (OCR).
Currency issuance and regulation: The RBA is in charge of releasing Australian banknotes and coins, as well as working to preserve public trust in the monetary system.
Handling Australia's foreign reserves: The RBA is in charge of keeping the nation's foreign exchange reserves at a sufficient level to handle any potential economic or financial shocks.
The Australian payments system, which enables individuals and companies to send and receive electronic payments, is supervised and regulated by the Reserve Bank of Australia (RBA).
Offering banking services to the Australian government: The RBA manages the government's bank accounts and issues government securities, among other financial services.
Research and analysis: The RBA undertakes research and analysis on a variety of economic problems to help guide its policy formulation and decision-making.
d. the Australian Treasury
The government department in charge of creating economic policies, handling finances, and collecting taxes in Australia is known as the Australian Treasury. Among its primary functions are:
Treasury supplies the government with economic policy advice, especially on matters like fiscal policy, tax policy, and microeconomic reform.
The Australian Government Budget, which describes the government's revenue and expenditure intentions for the upcoming year, is developed by the Treasury. The Mid-Year Economic and Fiscal Outlook (MYEFO), which offers updates on the budget position halfway through the year, is another document created by the Treasury.
Financial management: The Treasury oversees the management of the government's financial assets, obligations, and debt load. In addition, it is in charge of overseeing the management of the Future Fund and other financial assets owned by the government.
Revenue collection: The Treasury is incharge of overseeing the administration of Australia's taxation system, which includes the collection of taxes including income tax, corporate tax, and goods and services tax (GST).
Foreign engagement: The Treasury engages in negotiations on global economic concerns and represents Australia in venues like the G20 and the International Monetary Fund (IMF).
Q7. Identify at least one product or service of your choice that has been affected by economic variables in recent years. Explain what the product/service is and how the market has changed due to economic circumstances. (At least 100 words)
Housing stands out among the many things that have been impacted by economic factors in recent years. Changes in the housing market may have a big influence on the whole economy since housing is a significant asset class that is closely related to economic conditions.
In recent years, a variety of economic factors, such as interest rates, economic growth, and governmental regulations, have had an impact on the housing market in various nations. The record low interest rates that have been in place since the global financial crisis of 2008–09 has been one of the most important drivers. Low interest rates have made borrowing more affordable and increased home demand, which has raised prices across various areas.
The need for housing is also on the rise as a result of population and economic expansion. Immigration has accelerated population expansion in some nations and increased strain on the housing market.
In many nations, the housing market has undergone major change as a result of these reasons. Housing costs have surged in major regions, like Sydney and Melbourne in Australia, making it impossible for many individuals to afford to buy a property.
Governments have reacted to these shifts in a variety of ways, with some proposing measures like tougher lending rules and levies on foreign purchasers to calm down hot property markets.