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24 Cards in this Set
- Front
- Back
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The objective of monetary policy is to
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influence interest rates and credit availability to stabilise real GDP, employment and the price level
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Cash rate is
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the interest rate charged by the RBA for exchange settlement account funds
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The cash rate is important because
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it sets the cost of short term funds for banks, and influences the rate at which banks are willing to lend
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Monetary policy affects AD by
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changing the availability of bank credit, which impacts on interest sensitive spending
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Expansionary monetary policy is defined by
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RBA reducing the cash rate, lowering the cost and increasing the availability of bank credit, to expand spending and real GDP
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Expansionary monetary policy's impact on AD:
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lower cash rate --> lowering interest rates --> increasing the supply of funds --> increasing amount of investment (spending) demand as it makes it cheaper to borrow --> increasing AD=C+I+G+NX
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Contractionary monetary policy is defined by
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RBA increasing cash rate, increasing the cost and decreasing the availability of credit, t reduce spending and reduce inflationary ressures
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Contractionary monetary policy's impact on AD:
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raise cash rate --> increasing interest rates --> decreasing the supply of funds --> lowering investment (spending) demand --> decreasing AD=C+I+G+NX
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There are three tools to determine the cash rate
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1) open market operations; 2) FX swaps and intervention in the FX market; 3) redeposit rate
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OMOs are
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buying and selling of government securities by the RBA in th cash or short-term money market, ensuring that the D&S of ESA funds are such that they are in balance at the cash rate
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OMOs on expansionary mp means that
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RBA buys bonds (want banks to have more money to lend), banks sells bonds --> increase cash in bank reserves --> increase ability to create loans --> increase M3 --> decrease cash rate/interest rates --> increase investment --> increase AD
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OMOs on contractionary mp means that
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RBA sells bonds (want banks to have less money to lend), bank buys bonds --> decrease cash in bank reserves --> decrease ability to create loans --> decrease M3 --> increase cash rate/interest rates --> decrease investment --> decrease AD
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FX settlement are when
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RBA uses FX swaps to supplement or substitute for OMO, by either selling or buying Australian dollars
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ESA funds are
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a liability to the RBA
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Rediscount rates are
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the rate at which the RBA buys/sells short-term securities under repurchase agreement
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Redeposit rates can affect MP when
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the RBA changes the interest rate charged on banks, forcing banks to change their interest to consumers
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MP effectiveness depends on
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1) shape of the demand for money curve, as a steeper D means bigger interest change; 2) shape of the investment demand curve, as a flatter I means bigger interest change
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Feedback effects of MP refers to
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reductions in GDP, tending to reduce business profits, causing business to reduce investment
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The feedback effect on expansionary MP is
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initial supply shifts right --> cause I to increase --> shifts AD to the right --> increase GDP equilibrium --> increase in GDP so there are more transactions taking place (total money demand=transaction demand+asset demand) --> total demand shifts right --> interest goes back to the original
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Net export effect is when
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changes in interest rate affect the value of the exchange rate under floating exchange rate
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According to the net export effect, an increase in interest rate
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appreciates the currency, resulting in lower net exports
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According to the net export effect, a decrease in interest rate
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depreciates the currency, resulting in higher net exports
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Taylor's Rule relates
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observed interest rates to inflation and the deviation between potential and actual GDP
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Taylor's Rule is given by
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cash rate - actual inflation rate = 1.5 + a[actual inflation rate - target inflation rate] + b[(GDP - potential GDP)/potential GDP]
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