Topic 3 Monetary Policy

Front 1

What is the payments system?

Back 1

The payment system is the mechanism by which the funds are transferred from one party to another to settle financial transactions that occur in the economy.

Front 2

Why do financial markets pay so much attention to the cash rate?

Back 2

Financial Markets pay close attention to the cash rate as it has significant influence on all other interest rates in the economy. As it sets the overnight cost of funds in the short term money markets, it has direct impact on the rates on the rates in which financial institutions lend and borrow money at. This therefore impacts on the profitability of existing products (unless rates can be adjusted accordingly such as a variable home loan rate) and drives the cost of capital for individuals and for business. it is therefore a critical economic indicator for the economy and any moves by the central bank and other participants that result in pressures on the cash rate are closely observed by all market participants.

Front 3

What defensive actions could the RBA take during days when pensions are paid and cash holdings by the public increase? how does the RBA offset these cash increases?

Back 3

When pensions are paid by the government the cash holdings of the recipants of these increases. All other things being equal, the RBA will then take action to reduce the money supply in other areas of the economy so as to maintain the cash rate as close to target as possible.
It could do this by for example selling CGS (Commonwealth Gov Securities) into the money market, which will reduce money supply as the financial institutions that purchase these will have to pay cash to the RBA, hence taking this money out of the system.

Front 4

What is likely to happen when Centrelink credits age pensions to pensioners' bank account?

Back 4

The money supply will increase as any injection of funds by the government to any of the economic units does this.

Front 5

What is likely to happen when the RBA buys government securities from Australian investors?

Back 5

Increas the money supply as the investors that hold these securities will receive cash for the securities upon selling them to the government.

Front 6

What is likely to happen when banks raise funds by an overseas note issue?

Back 6

No impact as the amount of Australian dollars on issue does not change, therefore having no change to the money supply (assuming the government is not a party to the notes issue)

Front 7

Describe the likely consequences for GDP growth when the RBA sells CGS to raise funds for the Commonwealth Government?

Back 7

When the RBA sells CGS to raise funds, this reduces the money supply as investors in the issue use their surplus funds in the purchase. This serves to put upward pressure on the cash rate which in turn makes the cost of capital more expensive. This acts to constrict economic activity as a higher cost of funds will place downward pressure on business and consumer spending and investment as a greater percentage of their existing funds are needed to cover current variable rate debt. This also makes all new borrowings more expensive, which also reduces expenditure.

Front 8

Identify the various retail and wholesale payment instruments used in the Australian payments system.

Back 8

Cash transactions; is notes and coins issued by government and represent a store value. while cash transactions represent a large percentage of total transactions, it still represents only a fraction of the value of all transactions in the payments system.

Non-cash instruments: can be divided in to paper and non-paper. Paper including cheque and non-paper including EFTPOS, credit cards and direct entry credits and debits.

Front 9

Outline how the Australian payments system operates. why is it important for this system to be efficient and reliable?

Back 9

The payment system is the mechanism by which the funds are transferred from on party to another to settle these transactions. The payment system is the mechanism that allows consumers, businesses and other financial market participants to transfer funds to one another to settle these transactions. An efficient and reliable payment system is therefore a key ingredient to maintaining a stable and effective financial system. the Australian payments system handles transactions in accordance with their size, i.e. whetherthey are high value or low value. This determines whether a given transaction is settled in real-time or bathch processed after the net positions of each institution in the system have been calculated at the end of each business day.
before this can occur, however the payments must be cleared by the financial institutions involved.

Front 10

Why are there so many measures of money?

Back 10

Each measure has a different purpose and measures different concepts.

Front 11

Why is rampant inflation considered 'a bad thing' for the economy when obviously house prices rise and home owners receive windfall gains?

Back 11

Rampant inflation severely affects the distribution of welfare and wealth within an economy. Physical asset holders and the indebted are favoured; debt holders are punished. workers with market power are favoured; fixed-income recipients are punished.

Front 12

WHich goals are the most important for the RBA to achieve? Why?

Back 12

Inflation control and steady economic growth. Some under-employment of resources is often inevitable and can stem from factors other than monetary policy