INFLATION AND RISING INTEREST RATES
Inflation has been the focus in recent financial news. In June 2022, the World Bank
warned that “several years of above-average inflation and below-average growth now
seem likely.” Larry Summers, one of the world’s best-know economists, and coauthors concluded in a research paper that the current inflation regime is closer to that
of the late 1970s than it may first appear. (https://www.nber.org/papers/w30116)
In its June’s monetary policy decision, the Reserve Bank of Australia increased the
cash rate by 50 basis points to 85 basis points as a step in the withdrawal of the
extraordinary monetary support that is put in place during the pandemic.
The tasks below aim to help you understand the impact of inflation on the financial
market and the reactions from policy makers.
Address the following questions.
• What is stagflation?
• What are the examples and lessons of stagflation in the history?
• Why is stagflation a challenge to the economy?
Provide a description of the current state of inflation in Australia. Explain what causes the
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Explain the impact of rising interest rates on the Australian economy.
• How are the stock and bond markets affected?
• Which sectors are mostly impacted?
• If you are the central banker, how would you design the policies similarly or differently
than RBA to help the economic growth and employment?
Choose any country other than Australia that you are also familiar with and critically assess
the inflation issue in that country. Is inflation a near-term challenge there? What actions have
been taken (or are expected be adopted) to curb it? What is your assessment of the impact of
the inflation and the regulatory actions on the economy of that country?
Please also note that there is no definitive answer to this problem. You will need to conduct indepth research. You will be assessed on how well reasoned and researched your answer is,
rather than any specific conclusions that you reach. You need to support your views by
referencing for example, data, graph, research reports/papers, and news articles, etc