1.Monetary policy refers to the decisions made about interest rates and the supply of money. In New Zealand the Reserve bank is independently responsible for monetary policy to prevent usage and sway from political purposes. Price stability prevents good or services from getting rapidly more expensive (inflation) or rapidly decreasing in value (deflation) .Price stability is currently defined as “keeping the rate of inflation between 1-3 percent on average over the median term.” This is called the Policy targets agreement which is set by the minister of finance and the Governor of the reserve bank. This is achieved mainly by the official cash rate (OCR) which is set by the Reserve Bank and reviewed eight times per year and altered four
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Decreasing interest rates is an attempt to increase demand by giving households and businesses more disposable income to spend on goods and services thus increasing economic growth ( graph 2 Y->Y’) and aggregate demand (AD-> AD’)which can have a byproduct of inflation.In addition in the medium term this should increase investment spending as it is now relatively cheaper to borrow from banks, and this should benefit the economy in the medium to longer …show more content…
The Reserve Bank of New Zealand has one main tool to influence the expansion of the economy which is to adjust the OCR lower. This allows for more consumption and typically for the export sector it lowers the exchange rate making exports more competitive. During current expansionary monetary policy interest rates have been decreased, therefore businesses are more likely to invest and consumers are more likely to increase consumption spending due to the decrease in reward for savings causing an increase in aggregate demand (C+I+G+(X-M) (graph 2 Demand pull inflation AD->AD’).As the New Zealand dollar depreciates foreign investors are less likely to invest their money and the demand for the NZ$ decreases (graph 4 D1NZ$->D12NZ$) in New Zealand currency as interest rates have decreased and therefore the reward for saving has decreased. As the New Zealand dollar has depreciated in value, imports will become more expensive and may decrease creating a flow on effect of increased prices for inputs for machinery in New Zealand ,decreasing competitivity for New Zealand manufacturers.New Zealand exports will increase as it has become cheaper for other countries to buy goods due to the lower value of the New Zealand dollar and the lower exchange rate (graph 3 ER1->Er2). This will improve international trade balance as export receipts have increased and import payments have decreased
Decreasing interest rates is an attempt to increase demand by giving households and businesses more disposable income to spend on goods and services thus increasing economic growth ( graph 2 Y->Y’) and aggregate demand (AD-> AD’)which can have a byproduct of inflation.In addition in the medium term this should increase investment spending as it is now relatively cheaper to borrow from banks, and this should benefit the economy in the medium to longer …show more content…
The Reserve Bank of New Zealand has one main tool to influence the expansion of the economy which is to adjust the OCR lower. This allows for more consumption and typically for the export sector it lowers the exchange rate making exports more competitive. During current expansionary monetary policy interest rates have been decreased, therefore businesses are more likely to invest and consumers are more likely to increase consumption spending due to the decrease in reward for savings causing an increase in aggregate demand (C+I+G+(X-M) (graph 2 Demand pull inflation AD->AD’).As the New Zealand dollar depreciates foreign investors are less likely to invest their money and the demand for the NZ$ decreases (graph 4 D1NZ$->D12NZ$) in New Zealand currency as interest rates have decreased and therefore the reward for saving has decreased. As the New Zealand dollar has depreciated in value, imports will become more expensive and may decrease creating a flow on effect of increased prices for inputs for machinery in New Zealand ,decreasing competitivity for New Zealand manufacturers.New Zealand exports will increase as it has become cheaper for other countries to buy goods due to the lower value of the New Zealand dollar and the lower exchange rate (graph 3 ER1->Er2). This will improve international trade balance as export receipts have increased and import payments have decreased