The price of iron ore - one of Australia's major exports - fell to a 5-year low, declining by more than 60% from the beginning of 2014 until 2015 with little recovery since 2016. Prices of Australia's other major natural resource-based exports have seen similar declines. At the same time, there has been a significant increase in the unemployment rate and a large decrease in investment in the mining sector, though GDP growth rates have been relatively stable if somewhat below historical levels. The government budget deficit has also increased due to lower mining-related tax revenues.
Discuss the channels by which the fall in international mineral prices and the ensuing policy responses by the federal government and central bank have affected the macroeconomic variables of interest to policy makers (for example, output, unemployment, the exchange rate, and the current account balance). Do you think that the fiscal and monetary policies employed thus far have been appropriate? What policies would you recommend going forward, and what are the potential drawbacks of these policies? (You can assume that mineral prices will remain at current levels for at least the next few years.)
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