Economics > Monetary policy > Flashcards

Monetary policy Flashcards

(56 cards)

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1
Q

Monetary policy

A

policy operated by RBA on behalf of the govt. manipulates key financial variables in the economy

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2
Q

Objectives of monetary policy

A

-stability of currency in Australia
-Maintanance of full employment
-economic prosperity and welfare of people in australia

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3
Q

Role of the RBA

A

-responsible for implimenting monetary policy
-responsible for issuing coins and notes
-banker to the govt.
-banker to our commercial banks

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4
Q

Macroeconomic aims of monetary policy

A

-Pursuit of low inflation= 2-3% CPI
-strong and sustainable economic growth
-full employment

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5
Q

Conventional monetary policy involes

A

intrest rates/ cash rate

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6
Q

Interest rates

A

cost or price of borrowing credit and the reward/incentive to save income

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7
Q

Exchange settlement account (ESA)

A

means by which providers of payments services settle obligations that have occured in the clearing process

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8
Q

Conventional monetary policy

A

RBA’s direct guidance of the cash rate of intrest that applies in the overnight or short term money market (stmm)
-allows RBA to have an impact on longer term intrest rates

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9
Q

Short term money market (STMM)

A

-a market in which banks can borrow cash from and lend cash to each other overnight
-allows bankers to clear customer transactions at the end of the day
-banks are legally required to hold a positive balance in their ESA

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10
Q

Cash rate target

A

Ideal level of short term intrest rates that the RBA believes will help imrpove Australia’s macroeconomic conditions and living standards

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11
Q

Cash rate targeting

A

RBA can manipulate the rates-cash rate (rates that commercial banks borrow and lend to eachother)

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12
Q

this cash rate exchanges are put into the

A

overnight money market

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13
Q

how does cash rate influence intrest rates

A

banks pass these costs on to their customers- via a decrease or increase in intrest rates on loans etc. to households and businesses

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14
Q

Exchange settlement account

A

-all commercial/retail banks must hold an account with the RBA
-this is used to settle transactions-e.g transactions between banks=money goes through a payment system
-rather than setting all transactions seperately, they add them up at the end of the day
-ES accounts mmust be positive= If any of these transactions are not, banks trade between eachother

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15
Q

Conventional Monetary Polivy

A

-the RBA intervenes in the economy by placing a floor and a ceiling on the intrest rate in this market- no trasactions take place below-floor and no transactions take place above- ceiling

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16
Q

Floor of the market

A

-called the deposit rate -% intrest you recieve on a deposit
-same for banks in their ES account=if they have a surplus, and they dont lend it to another bank, the RBA will pay them a deposit rate= always= to the cash rate target -25 basis points

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17
Q

Ceiling of the RBA

A

-lending rate
-this is the rate the RBA will change banks who have a deficit in their ES account
-+25 basis points

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18
Q

Overall

A

-no transactions will take place above the lending rate or below the deposit rate
-commercial banks would not lend to other banks at a rate less than they could recieve from the RBA or borrow from other banks at a rate above what the RBA is charging

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19
Q

Tightening of monetary policy

A

RBA announcing a higher target cash rate, increasing intrest rates

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20
Q

OMO

A

open market operations
-manage money supply and intrest rates in an economy

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21
Q

Loosening of monetary policy

A

RBA announces lower cash rate target, intrest rates are reduced

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22
Q

Using OMO’s to maintain the cash rate system

A

-corridor system allows the RBA to impliment its monetary policy stance automatically, there are fluctuations in the supply of cash
-the actual cash rate wil move in response to changing market conditions with the policy intrest rate corridor
-e.g govt. spends more or
-Govt. takes more

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23
Q

Neutral stance of monetary policy

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A

-neither exapnsionary or contractionary
-cash rate neither induces or stops economic activity
-cash rate commonly at 3.5%

24
Q

Expansionary stance of monetary policy

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A

-level of cash rate is low enough to stimulate economic activity
-expansionary is commonly at below 3.5%

25
restrictive stance of monetary policy
-level of cash rate is high enough to restrict economic growth -restrictive at above 3.5%
26
Goals of monetary policy: domestic economic stability
will loosen if no inflation
27
Goals of monetary policy: achieve low infltion
-a restrictive monetary policy stance increases intrest ratesm leading to: -restrictions in AD -higher exchange rate= reduced prices of imported g/s decreasing pressure on inlation -tightening=contains inflationary expectatrions
28
Exchange rate intervention and cash rate
-to manipulate exchange rate= RBA directly enters foreign exchange market and either buys/sells AUD in exchange for another currency
29
Monetary policy
involves altering or maintaining the cash rate which in turn affects intrest rates with the ultimate objective of improving living standards for Australians
30
monetary policy is decided with the
RBA
31
Cash rate
the cash rate is the intrest rate of the overnight money market. It is a representation of the cost of money and is manipulated by the RBA as a tool of monetary policy
32
ESA surplus
the RBA pays banks who are in surplus an intrest rate worth 25 basis points (0.25%) below the market intrest rate. This lower rate is not very profitable, so these banks are in surplus (positive account balance) and some are in deficit (negative account balance
33
ESA Deficit
RBA charges banks who are in deficit an intrest rate worth 25 basis points (0.25%) above the market intrest rate, so these banks are enticed to borrow from the cash market
34
liquidity
amount of money in the cash market, changes day to day depending on the activity of the government
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How the RBA changes the cash rate
-RBA decides on a target cash rate -change the actual rate by increasing or decreasing liquidity -if there is a decrease in liquidity, demand for money increases, if there is increase in liquidity, demand for money decreases
36
How the RBA changes the amount of liquidity in the money market
-open market operations -involve the RBA selling or buying financial assets called commonwealth government securities/ repurchase agreements -increases/ decreases size of balances in the exchange settlement account
37
All transmission mechanisms by the RBA
-changing savings and investment -Affecting the cash flow of households and firms -wealth/ asset prices -availibility or supply of credit -exchange rate
38
Transmission by changing savings and investment
SAVING AND SPENDING -If intrest rates are high= more saving -if intrest rates are low= spending
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Transmission by cash flow
CURRENT LOANS -if intrest rates are high=people will not purchase more because they require more money to pay back a loan, leads to less discretionary income -if intrest rates are low= people will use less money to pay for their intrest, therefor spend more in the economy
40
Transmission by availibility of credit
ABILITY TO APPLY FOR LOANS -if intrest rates are high= people are less likely to spend in order to pay off loan -if intrest rates are low= people are more likely to pay off loan, thus spend more
41
Transmission by effecting the exchange rate
OVERSEAS INVESTORS/LOCAL -if there are high intrest rates= more overseas and local investors -if intrest rates are low= less overseas and local customers go overseas
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transmission by effecting the Asset prices/ values
HOW DEMANDED ASSETS ARE -if there are high intrest rates= people are less likely to spend more because assets are less expensive, making them feel less secure about their money -If there are low intrest rates=people will spend more because thier assets are worth more because their being demanded more- feel more secure
43
RBA's indicator checklist used to guide its monetary policy stance
1. Trends in inflation 2. Levels of national spending and confidence -dictates how the economy will spend their money 3.Labour market conditions -dictates employment prospects 4. Budgetary policy stance -if the budgetary policy stance is effective or not 5. International developments -if overseas, there is economic growth, bracing the economy for an economic boom period. -if there is slowing economic growth= readying for a slowdown
44
forward guidance as an unconventional monetary policy
involves RBA attempting to provide markets with a degree of certainty about the future direction of intrest ratest. -E.g RBA annonced that cash rate wouldnt rise until 2024, designed to give buisnesses and consumers more confidence to borrow and invest/spend
45
geopolitical issues in the economy
-accelerating inflation -Russias war against Ukraine -oil, gas and grain supplyies impacted -America's global instability of tariffs -war between israel and palistine -climate change
46
Australia's current achievement of economic goals
-Weak economic activity -Headline inflation at target but persistant underlying pressures -unemployment remain low
47
cash rate was set at what until feb this year
4.35% -highest in 12 years
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change in febuary this year of the cash rate to
4.10 and later 3.85%
49
Current cash rate
3.85%
50
A neutral cash rate is at
3.5%
51
An expansionary cash rate is at
below 3.5%
52
A contractionary cash rate is at
above 3.5%
53
why did the cash rate get increased in 2022/2023
-to account for inflation=try to limit it -restrictive
54
current monetary policy
=is at a "wait and see" stage -there is still underlying inflation, making the RBA hesitant -Inflation musrt reach 2.5% to loosen monteray policy
55
Strengths of monetary policy
-decided upon by the RBA, and hence much less likely to be affected by political bias -MP decisons occur very frequently= everymonth unlike budgetary policy and there is very little implimentation lag -are super effective at controlling inflation as it directly affects the issue
56
Weaknesses of Monetary Policy
-Controls one factor which affects the whole economy, so specific issues cannot be targeted effectively -very long Impact lag before a significant change in the level of economic activity can occur -monetary policy controlls the cash rate, which has a large impact on intrest rates however the extent of this impact is not always fully taken on board by all banks as the RBA has no control over banks
Economics
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