RMIT Classification: Trusted

BUSM 2565/2566 - Understanding Business Environment

Assignment 3: Economic Factors Analysis
Word limit: 1650 words maximum. Data tables and graphs excluded.

Submission deadline: Jan 16th, 2025, 23:59 (GMT+7)

Each day late of submission leads to a 10% of total maximum marks, i.e. 40 x 10% =4 mark deduction)

You need to work on the correct case and countries clearly in the instructions of Q1 and Q2. If you work on wrong
cases, marks will be penalized by 50%.

Question 1: Labour market trend forecast

Relate to your previous Assignment 1. In Assignment 1, you have worked on

Case 1: the choice of quitting college (dropping out)

Case 2: the choice of “lying flat”

Based on your previous individual work in Assignment 1, expand and elaborate more in Assignment 3
now with macroeconomic theories learnt. Discuss if more and more young people follow either of the
above trends (choose only ONE case based on your assigned work in Assignment 1), how will this affect
the macroeconomy? You are expected to discuss the impact of such a trend on the following:

a. factors of production and productivity and long-run economic growth. Relate the answer to
your previous work in Assignment 1;
b. labour market indicators.

Your answers should be first hypothetical, theoretical analysis/forecast for a country based on models
learnt so far in the course, especially from Topics 1,2 and Topic 8 until the end. Where possible, you are
also encouraged to provide real examples/stories from countries at your own choice.

(3+3 = 6marks)

Question 2: Country Macroeconomic Snapshot

a. Present the GDP growth rate, inflation rate, unemployment rate of your assigned pair of countries
during 2000-2024 below:

- If the last digit of your student ID is 1,3,5,7,9: your assigned country is UK and Japan
- If the last digit of your student ID is 0, 2,4,6,8: your assigned country is India and China

Compare and contrast the macroeconomic picture between 2 countries post-COVID, especially the
inflation situation between 2 countries in your assigned pair. What specific reasons cause the change in
inflation rate in the two countries? Back up your arguments with related theories, diagrams and real
data.

Suggested sources: World Bank data, IMF data, country reports, government websites.

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b. Collect data on GDP per capita and PPP GDP per capita of your assigned pair during the last 30
years (based on availability of data, you can pick only different key timings to see changes over time).
Present them in table(s)/graph(s).
i. Compare each of these indicators between two assigned countries (i.e. how country A has a
higher GDP per person than country B, and similarly higher PPP, GDP per person) and how the
gap between 2 countries changes over time).
ii. Discuss how the comparison differs based on different indicators.
iii. Does the difference in GDP per capita/PPP GDP per capita tell you exactly the difference in how
much an average person can buy in each country? Explain why or why not.
iv. Provide comments and explanations for possible differences in (ii) and (iii). Provide different
examples for PPP limitations from those two countries (like living standards differences) to
illustrate.
(8+6=14 marks)

Question 3: Policy Analysis - Improving AI’s tool answer

Discuss monetary policies that India used to address inflation from 2022 until now. Your answer should
assess how this monetary policy change has affected various aspects of economic activity, including
borrowing, consumption, investment, exchange rate, and GDP.

Your friend used an AI tool to assist in addressing this task. The AI-produced version is on page 3-4 of
this assignment.

Requirements:

i. Write an improved version: Use your knowledge of economic theories, along with data and
evidence from credible sources, write an improved academic version for the analysis. (7 marks).

Note: - You are not required to adhere to the structure or use the information provided by the AI if you
have a more effective approach to addressing the questions.

- Your grade will be based on the extent and quality of the improvements you make to the AI
output. You need to make substantial improvement. Simply copy paste can lead to zero mark.

ii. Provide a reflection on how you critically evaluated the AI-generated response and why your version
is superior to the AI outputs (3 marks)

(10 marks)

Question 4: Industry Engagement Reflection.

Identify at least 3 key economic concepts/theories/models that we have learnt in the course and the
guest speaker has applied in the presentation. Discuss how they are applied in his work.

Discuss how the presentation has allowed you to explore further out of texbook concepts.

Remaining 5 marks for Research quality and range of resources, and Referencing and language

Total: Q1 - 6marks, Q2 - 14 marks, Q3 - 10 marks, Q4 - 5 marks, 5 marks for overall quality = 40 marks
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AI-generated output in Question 3 which needs improvement

From 2022 to 2023, India faced significant inflationary pressures, driven by global supply chain
disruptions, rising commodity prices, and domestic demand factors. To combat inflation and stabilize the
economy, the Reserve Bank of India (RBI) implemented a series of monetary policy changes. Below is
an overview of the key measures and their impacts on various aspects of economic activity:

Monetary Policy Measures in India (2022-2023)

1. Interest Rate Increases

o Policy Repo Rate Hike: The RBI raised the repo rate multiple times to control inflation.
The repo rate was increased by a total of 250 basis points from 4% in May 2022 to
6.5% in February 2023. This was a response to rising inflation, which peaked at over
7% during this period, above the RBI's target range of 4%±2%.
o Liquidity Tightening: To further reduce inflationary pressures, the RBI also took steps
to absorb excess liquidity from the banking system, which had been amplified by
previous accommodative policies during the pandemic.
2. Inflation Targeting Framework
o The RBI maintained its inflation-targeting framework, aiming for 4% CPI inflation with
a tolerance band of 2% above or below that. This framework ensured that monetary
policy remained focused on price stability.
3. Open Market Operations and Other Tools
o The RBI conducted Open Market Operations (OMOs) to manage liquidity and bond
market stability. It also used tools like the Cash Reserve Ratio (CRR) and Marginal
Standing Facility (MSF) to further tighten liquidity in the banking system.

Impact of Monetary Policy Changes on Economic Activity

1. Borrowing
o Higher Borrowing Costs: The repo rate hikes directly impacted lending rates. As banks
raised their interest rates on loans and credit, borrowing became more expensive for both
consumers and businesses.
 Consumers: Higher rates made home loans, auto loans, and personal credit more
costly, dampening consumption, especially in the housing and consumer durables
sectors.
 Businesses: Investment loans for infrastructure, capital expansion, and working
capital also saw higher interest rates, leading to reduced borrowing by
businesses. Companies with high debt burdens faced increased debt servicing
costs.
2. Consumption
o Slower Consumption Growth: As borrowing costs increased and disposable income
pressures mounted due to rising prices of essentials (especially food and fuel), consumer
spending slowed. The high inflation in food prices, in particular, led to a decline in
discretionary spending.
o Impact on Household Savings: High inflation also eroded purchasing power, prompting
some households to increase savings as a precautionary measure, rather than spending.

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o Consumption-Driven Sectors: Sectors like real estate, automobiles, and retail

experienced weaker demand due to the reduced ability of consumers to afford these big-
ticket items.
3. Investment
o Decline in Private Sector Investment: Higher interest rates discouraged both private
and corporate investments, especially in capital-intensive industries. Investment growth
was further muted due to the uncertainty in demand and rising borrowing costs.
o Government and Public Sector Investments: The government continued to focus on
infrastructure investment as a key driver of growth, but private sector investment was
relatively subdued.
o Impact on Stock Market: Rising interest rates typically lead to a revaluation of equities,
as bonds become more attractive to investors. The stock market saw some volatility, with
investors shifting their portfolios away from stocks to fixed-income securities.
4. Exchange Rate
o Rupee Depreciation: The tightening of monetary policy in India occurred in a global
context where major central banks, such as the Federal Reserve, were also raising interest
rates. This led to a stronger US dollar, which, in turn, put pressure on the Indian rupee.
From 2022 to 2023, the rupee depreciated against the dollar, although the RBI intervened
in the forex market to manage volatility.
o Capital Flows: Higher interest rates in India made fixed-income assets more attractive to
foreign investors, contributing to some stabilization in capital inflows. However, the
depreciation of the rupee and global risk aversion still affected foreign direct investment
(FDI) and portfolio investments.
5. GDP and Economic Growth
o Growth Slowdown: While India’s GDP growth remained resilient compared to many
other economies, the monetary tightening exerted downward pressure on growth. Growth
was expected to slow in 2023 as high interest rates and inflation constrained demand.
 Inflation Impact: The economy grew at 7% in 2022 but showed signs of
deceleration in 2023, with real GDP growth forecasted to moderate due to lower
consumption and investment.
 Sectoral Impact: Sectors sensitive to interest rates, such as real estate,
construction, and automobiles, were particularly affected, while sectors like
agriculture and IT services showed more resilience.

Summary and Long-Term Outlook

The RBI’s monetary policy changes from 2022 until now have been focused on managing inflation while
trying to sustain economic growth. The interest rate hikes and liquidity tightening helped control
inflation but came at the cost of slower consumption and investment growth. Higher borrowing costs
led to weaker demand in sensitive sectors, but the policies also helped prevent runaway inflation,
stabilizing price expectations.

Going forward, the effectiveness of monetary policy will depend on how inflation evolves, especially
with the risk of global economic slowdowns and persistent supply-side challenges in food and energy.
The RBI may need to adjust its policy stance if inflation remains within the target range or if growth
pressures intensify.

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