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Australian Solutions to the Global Financial Crisis
Table of Contents
Executive summary 2
Introduction 3
Discussion and Analysis 3
The measures and discussion 3
Expansionary Monetary Policy 4
Positive Fiscal Policy 6
Other Economic Policy 7
The Analysis of Policy 8
The importance of banking 8
Establish a Perfect Financial Market 9
Control the Development of Financial Derivatives 9
Conclusion 9
References 11
Appendices 13
Australian Solutions to the Global Financial Crisis
Executive summary
This report will give an overview of Australian solutions to the global financial crisis. Firstly, this report will describe a summary which means the global financial crisis and analyzes the reasons and background because it is the start point of a chain of policies that Australia has made. Then this report will find out the solutions that Australia has taken and give a simple analysis of these solutions. During this progress, this report will give some example for the sake of understanding because with lively cases, people can understand the policies that Australia has made easily and clearly. At last, this report will explore the deep reasons why Australia take such measures so quickly and what is the effect
and what is in common of these solutions.
Introduction
The U.S. housing market bubble evaporates and subprime housing mortgage default leads to the subprime crisis in 2007. From that moment, a new crisis turns out which has spread to the whole financial field and spread to the real economy, becoming a global financial tsunami that swept across the whole world. This financial crisis has produced the largest financial dislocations since the Great Depression of the 1930s (Melvin &Taylor, 2009). With the influence and impact of crisis, the developed economies
sank into recession. Among all the countries which lost in quagmire, America and west countries are no doubt hit areas. In some countries, sharply declining economy and rising unemployment may lead to social instability. The international financial crisis makes the world economy a "turning point" in history. The international monetary fund expected that the next two years the growth of the world economy expected only 3.7% and 2.2%, which were the most pessimistic expectations since 2002. Many economic problems
turned up and the situation of Australian people became difficult. But after making a general survey of all countries all over the world, it could be obvious that Australia has deal with financial crisis very well which took measures quickly and hold the key points correctly. This report will give an analysis of this phenomenon that how the Australian government has taken the measures and what effects the measures come into being.
Discussion and Analysis
The measures and discussion
Under the influence of international financial crisis, the economy of Australia has
slowed down its paces and the signs became more and more obvious. In the third quarter of 2008 the economy rose by only 0.1% which was the lowest level of economic growth during the last seven years. After the global financial crisis, a large number of measures have been taken immediately to copy with it by many governments. Australian government was the major force during the progress that dealing with the economic problems in Australia which was influenced by the subprime-related 2007/2008 global financial crisis. Breitenfellner and Wagner (2010) have
concluded that there should be three interventions that governments could take: the first is government guaranteed debt issuance programs. The second is direct equity injections and the number three is purchases of distressed assets by the government. From that analysis, government can enter into the financial market to prevent or reduce the damage that the subprime-related 2007/2008 global financial crisis has caused. The measures that Australian government has taken included the followings.
Expansionary Monetary Policy
To avoid the bad
effect of the subprime-related 2007/2008 global financial crisis, Australian government has taken expansionary monetary policy quickly.
1. Australian government has cut interest rates continuously and sharply. Although Australia was paying attention to the inflation targeting which has been the policy of the governments of Australia since 1990s it changed its policies’ direction (Leybourne & Mizen, 1999). By the end of August 2008, the growth of annual rate of Australian broad money was 14.3% which has reduced 5% comparing with the peak number of 19.3% in January in the same year. The development speed of Australian banks slowed down (see appendix1). These data reflected that under the macro-financial environment, enterprise credit decreased and economic activity began to shrink. Faced this difficult situation, the federal reserve bank of Australia changed its policies quickly in the second half of the year. The federal reserve bank of Australia injected huge liquidity through the open market operations in early August which lowered the trade market’s interest rates about 5o basis points. Then from September, Australian cash
rate lowered from peak point of 7.5% to 5.25% which made all kinds of commercial banks dropped their mortgage rates about 1%. The real interest rates can convert between regimes characterized because of distinctions in mean, variance and persistence (Holmes, Dutu & Cui, 2009) so cutting interest rate could diffuse the difficulty that Australia was meeting. After a chain of policies, there were some space to breathe for commercial banks and other organizations.
2. Australian government has taken expansionary monetary policy quickly.
Australia’s innovation performance
always was blended so it used many strategies ((Dodgson & Steen, 2008). The federal reserve bank of Australia took a series of tactics including that increasing open market liquidity and repurchase varieties and enlarging the scope of repo security. The federal reserve bank of Australia also signed one document with other financial regulation organizations which called Memorandum of Understanding about the Financial Crisis Management. They signed agreements with other countries to establish currency exchange mechanism to ease