While the Budget factored in a decline in Australia’s terms of trade, the fall in global commodity prices over recent months has been larger than anticipated.

“While the Budget factored in a decline in Australia’s terms of trade, the fall in global

commodity prices over recent months has been larger than anticipated.” (Australian Treasury, Mid-year Economic and Fiscal Outlook 2012-2013, 22 October 2012, p16)
a) Discuss the reasons for the main movements in Australia’s terms of trade over the last decade.
b) What could be the likely impact of a decline in the terms of trade on the Australian Economy? Analyse the impact on the macroeconomic variables in Australia, making use of the Mundell-Fleming model, assisted by diagrams.
c) Discuss the implications for monetary and fiscal policy of the decline in the terms of trade. Make use of diagrams in your answer.

 
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