Monetary Flashcards
Who is the RBA
Independent central bank accountable to parliament
What are the goals of the RBA
(1) Stability of currency, (2) full employment, (3) economic prosperity
How does the RBA achieve its goals
Monetary policy, strong financial system, issuing banknotes
What is monetary policy
Monetary Policy are the RBA’s actions to influence money supply and ultimately the interest rates
Aggregate Demand Policy
What is the RBAs role in banking
Provides services to government overseas banks, manages reserves, determine the cash rate
What is the primary authority for Australias currency
RBA issues and creates money
What are the three objectives of the RBAs monetary policy
Currency stability full employment economic prosperity
What is the Cash Rate
Interest rate for overnight bank loans
How does changing interest rates affect the economy
Influences consumption investment net exports
How does the RBA act during an economic slowdown
Lowers interest rates to boost spending
Is monetary policy a demand-side or supply-side policy
Demand-side policy
What is the RBAs main goal
Low inflation
What does the RBA do when inflation is under control
Focuses on growth and full employment
What has been the RBAs recent stance
Expansionary monetary policy
What are three strengths of monetary policy
Short implementation lag effective at controlling inflation fewer political constraints
What are three weaknesses of monetary policy
Long induced expenditure lag imprecise impact less effective in recessions
What is a key time lag in monetary policy
Induced expenditure lag effects felt over time 40 percent after 12 months 100 percent after 3 years
How can monetary policy become pro-cyclical
Long lags might cause policy to worsen cyclical instability
Why is monetary policy effective at controlling inflation
Borrowers face higher repayments reducing spending
What is the relationship between monetary and fiscal policy
Fiscal policy can undermine or complement monetary policy
Why might monetary policy be less effective in a recession
Low rates dont force spending relies on indirect effects
What are the psychological constraints of monetary policy
Depends on consumer and business confidence which can reduce or amplify effects
How does political independence benefit monetary policy
RBA can raise rates without direct political fallout
Why is monetary policy blunt in impact
Affects overall economy not specific sectors
What can reduce the preciseness of monetary policy
Banks may not fully follow the cash rate target
What is the trade-off in pursuing multiple economic goals
Lowering cash rate for growth and employment may increase inflation
What does procyclical mean
A condition of positive correlation between the value of a good service or economic indicator and the overall state of the economy
