Determinants Of Corporate Dividend Policy Within Pakistan Finance Essay - Free Essay Example

This research examines different factors that determine cross sectional variations in corporate dividend policy such as profitability, growth opportunities and riskiness. Another aim of this is to check the significant relationship between losses and dividend cuts. Manages cater to investors by paying them dividends when investors put a stock price premium on payers. To test this prediction, I used companies that are listed on Karachi Stock Exchange (Pakistan) and test there are three stock price based measures of investor demand for dividend payers to check if catering theory of dividend exits in Pakistan. INTRODUCTION They are many reasons for the existence of dividend payments, but Miller and Modigliani (1961) prove that dividend policy is irrelevant to share value in the perfect and efficient capital markets. Which means there was no preference between the dividend payment or the capital gains. Arbitrage ensures that dividend policy is irrelevant. But in reality this doesnt happens. Firms cater investor needs to fully increase the share price, ownership and become a high profitable firm. Management make dividend policy with the consent of their investors. The determinant of dividend policy helps to predict the future growth and the stability of the firm; it also caters to the best interest of the investors. The aim of this paper is to find the determinant of dividend policies in Pakistan, and check whether these determinants have some impact of significance in the share value. And also check whether these determinants are same as in other under developed countries. the corporate sector of Pakistan is going to a bad phase these days due to the terrorism and internal imbalance political situations , so I want to check if Pakistani companies still giving the dividends to their investors and if not then what is the main reason for this and how will they cater new investors. And how this will affect the share price of that company in the stock market. All the regulations have been signal out concerning dividend payments, in effort to compare the results with those from previous research. Although there is no such research has been conducted in Pakistan, all the research related to dividend policy is done in India and other developing country unlike Pakistan. But this study will play an important role in determining the factors which influence the dividend policies of the country and the impact of these policies on the share value of the firm. Institutions have preference for dividend paying companies but there is little evidence that they prefer higher payout ratios or dividend yield. Lintners model (1956) of partial adjustment works reasonably well for the large number of companies. Mostly there is a negative relationship between the growth and the dividend payout and leverage and the payout. So this will also be tested in this paper. Companies having a higher growth opportunity are less likely to have free cash flow; if they dont have a free cash flow then they are unable to give dividends which give a bad signal to the market. Mostly managers are reluctant to cut dividends and that they will not increase dividend unless they are reasonably sure that they will not have to reverse this move soon. Basically managers want to carter the needs of the investors in their best interest so they hesitate to cut their dividend because this will discourage the investor. The cutting of dividend is a bad move as this gives negative signal to the market about the firm and also tells that the firm is full of risks. There is no proper cash flow coming into the firm so the person who has invested in the firm has greater risk of losing their money. So this also a very important determinant of dividend policy making. Managers hesitate to reduce the dividend because they want to play safe to not to repeat this move again. As dividend increases signal a reduction in risk because this shows that the managers are confident enough about the stability of future earnings. This also includes the agency theory which tells that dividends can be used as a means to control firms management. Distributing dividends reduces the free cash flow problem and increase the managements equity stake. Another agency problem that affects the dividend policy is between shareholders and debt holders. The risk that shareholders will expropriate debt holders by paying themselves excessive dividends has led to the often encountered covenants restricting dividend policy in bond contracts. So this is another determinant of dividend policy which helps to cut down the dividend. Catering theory also plays an important role in determining the dividend policy. Baker and Wurgler proposed the decision to pay dividends is driven by prevailing investor demand for dividend payers. Some investors have an uninformed and perhaps time varying demand for dividend paying stocks. Arbitrage fails to prevent this demand from driving apart the prices of payers and non payers. Managers rationally cater to investor demand, they pay dividends when investors put higher prices on payers and do not pay when investor prefer nonpayer. The propensity to pay dividends depends on a dividend premium in stock prices. This is will be tested using the time varying variables or proxies for dividend premium. Testing catering theory using Pakistani data is an objective of this research. This kind of study has not been done in Pakistan before, the determinant of dividends of corporate companies establish their policies according to these. The catering theory plays an important role in this. I will test the BW(2004) model of catering theory on Pakistani companies related to oil and gas, beverages, pharmaceuticals, fertilizer, financial, textile and FMGC etc sectors. All the companies register on Karachi Stock Exchange who pays dividend for that specific year is taken as the sample. The catering theory of dividends suggests that real financial markets are imperfect and inefficient, and corporations decide their dividend initiation and continuation decisions by catering to investors demands for dividends. LITERATURE REVIEW A test of the catering theory of dividends of Japanese electric appliances industry was done by Chikashi Tsuji (2010) all the sample they took was Japanese firms, they studied the affect of catering theory on the valuation of stock price. They replicate the methodology used by Baker and Wurgler to test whether the results holds true in Japan as they indicated. They concluded that corporate managers do not consider catering behaviour in either their dividend initiation decision or their continuation decision. These results were different from existing evidence for U.S market. They took dividend initiation as value weighted dividend yield where as Baker and Wurgler used equally weighted. So they conclude that value weighted dividend yield declines, when Japanese firms tend to initiate dividend payments. Catering theory of nominal share prices by Malcom Baker, Robin Greenwood and Jeffrey Wurgler (2009) suggests that typically the supply of different stocks cater to different incentives of investors. Manager increase the low priced securities supply that investors are willing to pay premium for it. So this existing literature is dealing with stock splits which eventually decrease the value f the stock price but this increased the supply which leads to high valuation for the firms rather than high priced and large firms. Many board of director chooses to split their shares to manage the nominal value and increase the number of outstanding shares but this doesnt help them to change the overall market value of the firm. This only done to cater the needs of investors and initiate their paying power of premium for even through that their fundamental values dont increase. Manager increase the supply of low priced shares for which the investors are paying premium for them. So the splits increases and help them to increase the valuation of the firm as the low priced firm are more attractive to investors then high priced firms. Catering theory also affects the post split prices for the large capitalization firms rather than small firms, according to the author that is also telling the reason that why firms initiate to go for the share splits. Price management appears to over valuate the low priced firms so the more often firms go for splitting shares they often end up with low returns. According to Jain, Shekhar and Torbey (2009) study, they evaluated the economics of the choice of form of payout initiation mechanism adopted by IPO firms. Their results suggest that IPO firms demonstrate preference for repurchases over dividends as the specific form of payout initiation mechanism. They compared the results of pre IPO and post IPO announcements, and found out that the market views post IPO payout initiation favourably then pre IPO. But the market was in different to the specific form of payout initiations adopted. The model they introduced in this study was the test the dividends and repurchases represent distinct payout mechanism adopted by IPO firms with fundamentally different characteristics and motivation to initiate payouts during post IPO phase. The conclusion they drawn was that the dividend initiation are primarily driven by life cycle and catering theory considerations. So the signalling theory provides accurate explanation for the payout initiations through share repurchases. The study for the international presence of dividend catering across a sample of twenty three countries was done by Ferris, Jayaraman and Sabherwal (2009) these firms incorporated in common law not the civil law nations. They conclude that when legal regime and its accompanying set of investor protections permit, investors force dividends from managers but they also attempt to extract such payouts indirectly by placing a high value on dividend paying firms. The variables they took were size, premium, operating income and book to market. This will give a the determinants of dividend will leads to the increase in stock price. In 2008, Polk and Sapienza came up with the corporate investment decisions which will eventually leads to discover the impact on stock market. Catering theory plays a major role in this, as mispricing might influence individuals firms decisions. For this purpose they used discretionary accruals as the proxy for mispricing. They conclude that there was a positive relationship between abnormal investment and discretionary accruals. The firms who have high RD or share turnover are more sensitive to discretionary accruals. And whereas the firms with high abnormal investment have low stock returns. In the theoretical model tested by Aghion and Stein (2008) explained the revenue catering theory. They proposed that investors have time varying demand for revenue growth and manager will cater to this demand by offering higher revenue on which investors are putting premium on the revenue. They took the sample from high tech and health sectors. Firms in these sectors are more likely to meet analyst forecasts of revenue when previous years revenue premium is high. Catering theory of dividends also involve a big cost, these cost involves cost of premium tax , cost of risk and opportunity cost, all these costs were studied by Cohen and Yagil (2008). The main issue addressed by their model was the negative relationship between the expected dividend per share and the ratio of information about the cost of the dividend held by category investors and arbitrageurs. The cost of dividend has been shown in to three types: premium tax, risk and investments. So in this article the author conclude that there is a linkage between investment, financing and dividend polices decisions, and this is mainly affected by the catering theory which was proposed by Baker and Wurgler. The risk premium consists of two components, first is the increase in financial leverage resulting from dividend payment and the second is the semi contractual obligation of dividend paying firm to maintain the dividend payment. So the model predicts that there is negative relationship between these three premiums and expected dividend per share. This also predicts that if the firm is operating in financially risky environment prior to dividend payment, then it will be negatively related to financial leverage. Researchers came up with this conclusion that the dividend sum depends on its short term and long term impact on the stock price and also depends on the financial leverage and investment opportunities. A study on dividend policy and the behaviour of investors, Sabur Mollah and Asma Mobarek (2007) came up with the satisfactory explanation of the firms who is catering investors sentiments on this. They suggested that mostly dividend decision is governed by those managers who have somewhat their personal interest involved in. The findings also suggests that the investors are willing to invest in those firms who has enough cash flow to pay out the dividends, as cash flow is a better measure of the companys capacity to pay out dividends and profitability. Dividend policy, risk and catering have a positive relationship; this was found out by Hoberg and Prabhala (2006). They reported that risk is significant determinant of propensity to pay dividends and explains up to 40% of the disappearing dividends puzzle. The second thing they found out was that the catering in insignificant once there is an account for risk. Share holder rights also play an important role in dividend policy. This was studied by Jiraporn and Ning (2006) agency costs as a determinant of dividend policy. They determined that how dividends are related to the strength of share holder rights so they found out that firms which plays higher dividends their share holder rights are more suppressed. So they studied the impact of share holder rights on dividend policy of a firm. As a result, dividend acts as a substitute for share holder rights. So the evidence is there that the regulations influence the relationship between dividends and the share holders rights. Another aspect of catering theory by Richard and Zhang (2005) is given by comparing the share repurchase with giving out dividends and what is the impact of mangers and investors in this. They discussed that market immediately react to the dividend announcements rather than repurchase, but mangers decision is based on his time horizon and his own incentives attached to it. Investor does positively react to dividend news but mostly managers discourage this due to the signalling hypothesis. They consider that it will incorporate the firms news immediately into the market. So when making decision of dividends the firm caters to investor demands. So according to these researchers they cater to investor demands by paying dividends and repurchasing shares. Also they found that firm free cash flow is reinvested in new NPV projects impact on the investors and the valuation or their share prices. So they concluded that catering through dividend and repurchases is inefficient though it has strong reaction from the market but the managers are more willing to invest in positive NPV projects. Determinant of dividend policy have a great impact on stock price of the firm. This eventually affects the value of the firm. Mostly investors invest in those firms who have a regular pattern of giving dividends. Bogdan Stacescu (2004) examined dividend policy for a sample of Swiss companies. They came up with determinants which affect the dividend policy, such as profitability, growth opportunities and riskiness. Past and present income growth is more relevant then the future growth of dividend changes. Price volatility seems the most significant factor in these changes. They also determined the relationship between losses and the decrease in dividends, when the firms dont give dividends they occur losses as in investors are reluctant to invest in those firms whose cash flow is not certain. So managers hesitate to cut out the dividends as it gives negative informational signal to the Swiss market and to dividend changes. According to Malcom Baker and Jeffrey Wurgler (2004) came up with the explanation of dividend payment. They proposed that dividend payment is done on the basis of investors demand. Mostly managers cater to investors by giving them incentives such as dividend premium. By putting a premium non payer is initiated when the demand is high, there is expectation of future earnings, whereas when there is no premium that implies that more investment is done and is discouraging for the investors as psychological point of view. They constructed four stock price based measure for the investor demand, the broadest one was about to check average between market-to-book ratio, second one was checking the difference between the cash dividend and stock dividend share classes, third one was related to dividend initiations this will affect the stock price of company, and lastly future stock returns of payer and non payers. Some investors have time varying demands for dividend payments and if its not fulfilled then essentially it effects the value of the stock prices. So dividend initiations and omissions is connected with the value of share prices. According to this article, when managers pay a dividend premium only then investors are ready to invest and for that reason they studied what sentiments of investors are attached with this time varying dividends premium and what is the most they are interested in. So they came up with the explanation that when dividend premium is high, investors are seeking firms that depicts safety, security in the long run and excess of cash, whereas firm with no dividends means increase in capital and future earnings expectations. So sentiments have a strong correlation between dividend premiums and investors expectations. The relationship between initiations and omissions of dividend premium is apparent to clientele demands. So by concluding these author came up with the result that managers only cater those investor by paying dividends when the investors is willing to put a stock price premium on payers not by when they actually doesnt want it. This is due to the initiation of the high and low demand of dividends. Baker and Wurgler (2003) came up with the appearing and disappearing dividends and they linked this with catering incentives. They used the methodology of Fama and French (2001) to identify a total of four distinct trend in the propensity to pay dividend between the period 1963 and 2000. The propensity to pay dividends increases when a proxy for the stock market dividend premium is positive and decreases when it is negative. They conclude that dividend tends to disappear during pronounced booms in growth stocks and reappears after crashes in such stocks. 3. METHODOLOGY The methodology used for testing different determinants of dividend which has an impact on the profitability, growth and riskiness on Pakistani firms listed on Karachi Stock Exchange for the year 2010. The test will also be constructed to find the relationship between share price reactions to the announcement of divined changes. Another methodology will be used to check the catering theory of dividend and its impact on the investors demand for the certain premium stock on payers. This will follow Baker and Wurgler model (2004), so the existing theory of BW (2004) is used to check whether catering theory exists in Pakistani companies or not. No one has ever done this kind of research in Pakistan before, so this will help in understanding the behaviour of investors towards the premium stocks and will also help us to identify which determinants have more predictive power to explain the changes in dividend policies. So there is theoretical contribution in this research as the theory deve loped is unique, the sample which is to tested is also recent observations so it will give the clear view about todays market. 3.1 Economic model: For testing the major determinants of dividend policy in Pakistan which affects investors perception about the firms value and the affect of the catering theory on this will be done by using the economic model Ordinary Least Squares (OLS). As the data is cross sectional so it will be useful to test through OLS model. The coefficient will be also of OLS. 3.2 Variables: The variables used to test the factors that influence the payout ratio and the dividend yield were ROA, Capital gearing ratios, Price volatility, TA, voting rights and market-to-book ratios. All these values can be taken from the annual report. A firm-year observation is called as a payer if it has positive dividend per share by the ex date, else it is a non payer. The variables taken are : PayersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ = New PayersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ + Old PayersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ + List PayersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ Old PayersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ = PayersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼-1 New Non payersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ Delist PayersÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ The first identity defines the number of payers and second describes the evolution. Payers is the total number of payers. New payers is the number of initiators among last years non payers, Old payers is the number of payers that also paid last year, List Payers is the number of payers this year that were not in the sample last year, New payers is the number of omitters among last years payers and Delist Payers is the number of last years payers not in the sample this year. Note that Lists and Delists refer to companies added to and removed from the Karachi Stock Exchange first section. But this will include the data for the previous years too, so this will be difficult eventually to find list payers as the data we will cross sectional. Note that the new lists include the IPOs firms. Below are the three variables defined to capture dividend payment dynamics as in BW (2004) : InitiateÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ = ContinueÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ = List PayÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ = In words, the rate of initiation (Initiate) is the fraction of surviving non payers that become new payers. The rate at which firms continue paying is the fraction of surviving payers that continue paying. It can also be taken as one minus the rate at which firms omit dividend. The rate at which new lists in the sample pay List pay is the payers as percentage of new list at time t. These variables capture the decision whether to pay dividends, not how much to pay. The investors categorize shares based on whether they pay dividends as it could be taken as safety. Another reason for this is the payout ratio is sensitive to profitability and dividend yield is sensitive to changes in share prices. The decision to initiate or omit is always a policy decision. 3.3 Hypothesis: The hypothesis to be tested states that there is no difference in the dividend premium determinants which can cause the dividend policies to change. And the second hypothesis states that there is no impact of catering theory of dividends that exists in Pakistan. To test the propensity to pay dividends depends on dividend premium in stock prices, use time variation in three proxies. The first is the stock market dividend premium variable, which is the difference between log average market-to-book ratio of dividend payers and non payers. The market-to-book ratio is book assets minus book equity plus market equity, all divided by book assets. This could be taken as equal and value weighted averages of market-to-book ratios separately for payers and non payers in each year. The second measure of the relative stock market valuation of dividend payers is the difference between the future value-weighted returns of payers and non payers. According to BW (2004) model, managers rationally initiate dividends to exploits an apparent market mispricing. The high rate of initiations should forecast low returns on payers relative to non payers as the relative overpricing of payers reverses. Market valuation of dividend premium and the future returns is the difference between future returns on value weighted index returns of payers and non payers. The third measure is the difference in the prices of Citizen Utilities (CU) cash dividend and stock dividend share classes. This can be calculated as the difference in the log price of the cash payout share and the log price of the stock payout share. CU dividend premium doesnt reflect anything about investment opportunities. This an advantage over the broader dividend premium variable. And if we talk about the disadvantage of CU dividend premium it is only one, which is stock payout share is more liquid than cash payout class. 3.4 Regression: To examine this relation between dividend premium and the rate of dividend initiation (continuation) formally, the estimates are as follows: InitiateÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ = a + + + ContinueÃÆ' ¡Ãƒâ€šÃ‚ µÃƒâ€šÃ‚ ¼ = a + + + whereas the dividend premium and Citizen Utilities dividend premium is denoted by this . DATA Sample criterion This proposal includes the data of Pakistani companies which are listed on Karachi Stock Exchange (KSE). The companies which had paid the dividends in 2009-2010 year are included in the sample. The main data will be collected by the annual reports. Every company has reported dividend paid to the shareholders in their annual reports so this is easy to gather information through this. Foreign companies and the financial companies listed on KSE are also included as the sample criterion. Pakistani firms pays dividend once a year unlike the American companies who pays quarterly. So the Ex dividend days are usually in June and July. So the analysis of this research is based on yearly observations. The sample collected includes all the firms in the fertilizer industry, transportation industry, textile industry, financial institutions, FMGC, oil and gas industry and pharmaceutical sector which are listed on KSE and pays dividend for the year 2010. The following data which is being collected through KSE from the annual reports are : Total assets, stock Price and share outstanding at the end of fiscal year, income before extra ordinary items, interest expense, cash dividend per share ex date. The firms with book equity below Rs. 250,000 or assets below Rs. 500,000 are excluded. To calculate the impact of firm characteristics and dividend yield and the payout ratio we need the data of market -to-book ratio, return on equity, return on assets, sales, capital gearing ratio and the previous dividend yield and the payout ratio is also needed. This will tell what factor causes the change in dividend policy and which has more significance on these that will affect the value of the firm. Approximately all the firms who have given the dividend in the year 2009-2010 are included in the sample. Econometric Limitations There are some limitations and assumptions related to our research. Only those firms are included in the sample who has paid dividend in year 2009-2010 The population is assumed to be normal. All samples are Pakistani companies which are listed on only Karachi Stock Exchange. The sample is taken for the one year so the delist companies is not included The sample is random and is a true representative of the population. The firm which has assets below Rs. 500,000 is not included in the sample. The sum of the OLS residual is zero, while the sample average is also zero. The sample covariance between the independent variable and the error term is zero. Other variables were not included due to the non-availability of data. CONTRIBUTION The contribution of this research has realistic impact on the corporate dividend policies of Pakistan. This research will eventually help to determine the main determinants of dividend policy and the impact of that on stock prices. Catering theory of dividends is also another important determinant which influences the policies made for the dividends. This will tell how managers cater to their investors interest and how can they charge a premium for their stock prices. This has not been tested in Pakistani firms data yet, so this is also another contribution that this theory is been tested. The time period is also latest so that will also give a recent view about the todays market and todays investors interests. All the firms that are listed in KSE index and who gives dividend for the specific year are included, and the reasoning of those firms which are not giving dividend that year will also be tested. There will be the comparison between the different corporate sectors of Pakistan who pays dividend and due to this, what is the impact on their share price will also be tested. For example fertilizer sector vs. car industry, how managers cater their investors interest in both. And how can this influences the decision of dividend policies that to be made of that specific industry. Although there is no such research has been conducted in Pakistan, all the research related to dividend policy is done in India and other developing country unlike Pakistan. So this will give new horizon in this field of corporate finance. The basic model presented by Baker and Wurgler (2004) of catering theory of dividends will be tested on Pakistani companies (which are listed on KSE). Baker and Wurgler proposed the decision to pay dividends is driven by prevailing investor demand for dividend payers. Some investors have an uninformed and perhaps time varying demand for dividend paying stocks. . Managers rationally cater to investor demand, they pay dividends when investors put higher prices on payers and do not pay when investor prefer nonpayer. This will be tested that the propensity to pay dividends of corporate sector of Pakistan depends on a dividend premium in stock prices.

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Between the Wars Free Essays

The event that had significant impacts during the interlude between the First and Second World Wars would be the Great Depression. The effect of this financial crisis, not only in the United States but also in other parts of the world, was apparent both in the domestic front and in the international community. The Great Depression started during the late 1920s and would stretch until the next decade. We will write a custom essay sample on Between the Wars or any similar topic only for you Order Now This historical turning-point was triggered by Black Tuesday, which was the day when the stock markets had a major downturn. (Rothbard, 2000) The impact of this event, both positive and negative, was massive indeed as the country was forced into a state of great recession and then reassessment of economic and social policies. (Mcelvain, 1993) In the ground level, the people experienced difficulties, as employment becomes scarce, thereby leading to poverty and hunger, which was prevalent during that decade. The citizens in the grassroots were the ones that was most affected, for the depression was deeply felt by everyone. The length, lasting 10 years, was overwhelming indeed; the extent of the crisis was equally devastating. The agriculture and primary sectors industries experienced economic slumps even bankruptcies, which in turn burdened the people whose wages declined and employment opportunities disappeared. The end of this Great Depression coincided with the start of the Second World War. The implication of the financial crisis was not only social but also political, as policies were forced to be reassessed and eventually changed. The New Deal policy was a result of the crisis. Also, government officials debated the liberal policies in economics, as many abandoned liberal economics, and advocated more protectionist policies. The impact of the Great Depression is far-reaching and vast, as it is political, social and economic. References Mcelvaine, Robert. (1993). The Great Depression: America 1929-1941. United States: Three Rivers Press. Rothbard, Murray. (2000). America’s Great Depression. United States: Ludwig Von Mises Institute. How to cite Between the Wars, Papers

Business Economics Demand Pull and Cost-Push

Question: Describe about the Business Economics for Demand Pull and Cost-Push. Answer: (a) If the wages of cleaners is increased in a burger shop, the supply of burgers will be reduced due to increase in the cost of production. Figure 1: Decrease in Supply (Source: Created by Author) The graph shows that supply from S to S2 that in turn leads to excess demand at the old equilibrium cost P (Canto, Joines and Laffer 2014). (b) Since burger is considered as a normal good and as a result, with the fall in income the demand for burger will decrease. Most of the goods that we usually purchase are considered as normal goods. They are also considered as a superior commodity (Atkinson and Stiglitz 2015). Figure 2: Normal Good (Source: Created by Author) A single seller who sells a unique good in the market characterizes a monopoly market structure. The seller does not face any competition in the monopoly market, as he is the single owner of commodities with no close substitutes. On the other hand, an industry is a natural monopoly when a single firm can supply a commodity to a complete market at a subordinate cost (Askar 2013). Figure 3: Monopoly (Source: Created by Author) The above graph shows that more quantity Q2 can be sold at a lower price P2. The slope of the AR curve is downward sloping under monopoly that in turn implies that if the monopolist sets the high prices, the demand will decrease. Under the monopoly market structure, there is bound to be interaction between the forces of demand and supply (Anton and Biglaiser 2013). Under perfect competition price is equivalent to marginal cost at the equilibrium output. However, under monopoly the price is larger than average cost. When the Reserve Bank of Australia intervenes in the foreign exchange market, it generates demand as well as supply for the Australian dollar by purchasing or selling Australian dollars against a different currency. In the exchange market of the Australian dollar, the RBA always conducts its interference due to the fact that liquidity and earnings are utmost in that market. Most of the transaction of the foreign exchange intervention of the RBA takes place in the spot market. Traditionally, the Reserve Bank of Australia has usually chosen to intervene by performing in the foreign exchange market in its own name (Benes et al. 2015). The benefits to Australia of the appreciation of the Australian dollar are as follows: With the appreciation of the Australian dollar, Australian exports are bound to become more costly. The imports into Australia will become reasonable and as a result, there will be increase in demand for imports. This has the probability to worsen the current account deficit (Garton, Gaudry and Wilcox 2012). The preferential trade agreement that Australia shares with China mainly includes a currency deal. This in turn allows the Australian dollar to trade directly against the currency of China. China has also allowed RMB to be traded against the AUS dollar directly. As a result, if the foreign investors become optimistic about China, it would lead to an increase in the demand for RMB. The economic interaction between Australia and China is likely to provide a wider implication for the Asia-Pacific area both in terms of state capital flows as well as in terms of financial security (Bowman, Gilligan and OBrien 2015). The percentage change in the value of the Wholesale Price Index on a yearly basis is termed as inflation. It efficiently measures the change in the prices of a basket of commodities and services in a year. The imbalance between demand and supply of money as well as changes in the cost of production and distribution leads to inflation (Bresciani-Turroni 2013). The major cause of inflation is merely the growth in the quantity of money. The level of prices and the value of money also lead to inflation. There are mainly two types of inflation that includes demand-pull inflation and cost-push inflation. Figure 4: Demand-pull inflation (Source: Created by Author) Demand-pull inflation takes place when aggregate demand for commodities and services in an economy increases more rapidly as compared to the productive capacity of the economy (Addison and Burton 2013). Figure 5: Cost-push inflation (Source: Created by Author) On the other hand, cost-push inflation takes place when prices of production procedure inputs rise. Increasing wages are also a major factor that leads to cost-push inflation as wages are considered the most imperative cost for firms. The two economic policies that the government could apply to reduce inflation are as follows: Fiscal Policy: The government can raise taxes as well as cut spending. These in turn improves the budget circumstances as well as help to reduce demand in the economy (Auerbach and Gorodnichenko 2012). 2. Monetary Policy: The rate of interest could be increased by the Central Bank that will in turn make borrowings more costly and saving more attractive. The quantity theory of money states that the wide-ranging level of prices of goods and services is directly comparative to the amount of money in circulation or money supply. It mostly states that there is a direct relationship between the quantity of money in an economy as well as the level of prices of commodities and services sold (Su et al. 2016). According to Quantity Theory of Money, if the amount of money doubles in an economy, the level of price also doubles. According to the economists, a rapid increase in the money supply leads to a rapid rise in inflation. Money growth that exceeds the expansion of economic output results in inflation. If the makers of the monetary policy decrease the supply of money, the rate of interest will get increased. If the rate of interest are determined by free economy it becomes more attractive in order to deposit funds as well as to diminish borrowing from the Central Bank. One of the rate of interest that is advertised in the free economy is the coupon rate. As per the economists, competitive markets allocate resources efficiently. According to the economists, efficient allocation of resources takes place when individuals are able to choose the commodities and services that they desire. Resources are being allocated effectively mostly when they are being used to manufacture the appropriate amount of goods as well as services that is desired mostly by the customers. Allocative efficiency requires that an individual produces each commodity up to the point where the advantage it conveys to the society. According to the economists, an efficient allocation of resources is the combination of distribution of inputs as well as outputs such that any alter in the economy that makes an individual better off. Efficiency is also obtained when there is efficiency in the production. In other words, the manufacturing of the largest value of commodities as well as services with available resources. It also takes when all mutual benefits gained from busin ess are exhausted (Rancire and Tornell 2016). The non-price determinants of demand are as follows: Branding: Sellers make use of advertising, product quality, and customer service as well as product differentiation. That in turn leads to strong brand images and as a result, the purchasers have a strong preference for their commodities. Hence, the demand curve shifts towards the right as the demand for products increases. Market Size: With the rapid expansion of the market, the demand of the customers for the goods is likely to increase (Verheyen 2015). Complementary goods: The demand for a commodity is influenced by the change in the price of the product. As a result, the demand for movies is likely to get impacted by the price of popcorn in the movie theatre. Similarly, the demand for movies in the particular theatre is also likely to get influenced due to the price of nearby parking. Available Income: If the amount of income of the purchasers alters, the propensity to purchase will also change. Thus, irrespective of price, if there is an economic boom, an individual is more likely to purchase. Seasonality: The requirements for commodities alter by time of year. As a result, there is a powerful demand for grass mowers in the spring, but not in the fall. Future Expectation: The purchasers are likely to purchase more commodities in the future, if they expect that the price is likely to increase in the future. The value of money is determined by the supply of money as well as demand for money that is similar to that of the price of a commodity. Quantity Theory of Money states that the general level of price (P) is directly relied on the supply of money (M). In other words, if M doubles, P will also double. On the other hand, if M is diminished, P will also diminish by the similar quantity (Cline 2015). The growth of the money supply determines the inflation rate. According to Quantity Theory of Money, if the amount of money doubles in an economy, the level of price also doubles. This in turn leads to inflation in the economy. As inflation increases, the value of money diminishes. References Addison, J.T. and Burton, J., 2013. The demise of demand-pull and costpush in inflation theory.PSL Quarterly Review,33(133). Anton, J.J. and Biglaiser, G., 2013. Quality, upgrades and equilibrium in a dynamic monopoly market.Journal of Economic Theory,148(3), pp.1179-1212. Askar, S.S., 2013. On complex dynamics of monopoly market.Economic Modelling,31, pp.586-589. Atkinson, A.B. and Stiglitz, J.E., 2015.Lectures on public economics. Princeton University Press. Auerbach, A.J. and Gorodnichenko, Y., 2012. Measuring the output responses to fiscal policy.American Economic Journal: Economic Policy,4(2), pp.1-27. Benes, J., Berg, A., Portillo, R.A. and Vavra, D., 2015. Modeling sterilized interventions and balance sheet effects of monetary policy in a New-Keynesian framework.Open Economies Review,26(1), pp.81-108. Bowman, M., Gilligan, G. and OBrien, J., 2015. The China-Australia Free Trade Agreement and the Growing Acceptance of Chinese State Capital Investment.Asian Journal of Public Affairs,8(1), pp.03-24. Bresciani-Turroni, C., 2013.The Economics of Inflation: A study of currency depreciation in post-war Germany, 1914-1923. Routledge. Canto, V.A., Joines, D.H. and Laffer, A.B., 2014.Foundations of supply-side economics: Theory and evidence. Academic Press. Cline, W.R., 2015. Quantity Theory of Money Redux? Will Inflation Be the Legacy of Quantitative Easing?.National Institute Economic Review,234(1), pp.R15-R26. Garton, P., Gaudry, D. and Wilcox, R., 2012. Understanding the appreciation of the Australian dollar and its policy implications.Economic Round-up, (2), p.39. Rancire, R. and Tornell, A., 2016. Financial Liberalization, Debt Mismatch, Allocative Efficiency, and Growth.American Economic Journal: Macroeconomics,8(2), pp.1-44. Su, C.W., Fan, J.J., Chang, H.L. and Li, X.L., 2016. Is there Causal Relationship between Money Supply Growth and Inflation in China? Evidence from Quantity Theory of Money.Review of Development Economics. Verheyen, F., 2015. The role of non-price determinants for export demand.International Economics and Economic Policy,12(1), pp.107-125.