Economics Unit 4 AOS 1b AD Policy — Monetary policy

Question 1

Define monetary policy

Answer 1

Maintains the stability of the financial system
Issues and controls the nation’s currency

Question 2

Explain how the RBA will target the cash rate

Answer 2

RBA will place a floor (deposit rate) and ceiling (lending rate) in the overnight money market
No transaction is to occur below the deposit rate and above the lending rate

Commerical banks would not borrow nor lend to other banks at a rate less than they would receive from the RBA

Question 3

What is cash rate targeting

Answer 3

The RBA have the ability to target the rates at which commercial banks borrow and lend to one another

The bank can then pass on these costs to its customers (via increase/decrease in interest rates on loans to households and businesses)

Question 3

explain tightening monetary policy

Answer 3

The RBA announces a higher target cash rate

Question 4

Explain the role of the RBA with respect of monetary policy

Answer 4

RBA is independent and does not operate within the Government
It has 3 goals
1. The stability of the currency of Australia
2. The maintenance of full employment in Australia
3. The economic prosperity and welfare of the ppl of Australia

Question 5

define exchange settlement accounts

Answer 5

All commercial/retail banks must hold an account with the RBA
ES accounts must have positive value after the transactions have been settled

Question 6

explain loosening monetary policy

Answer 6

The RBA announces a lower target cash rate

Question 7

define cash rate

Answer 7

The interest rate banks pay to borrow funds from other banks in the overnight money market