monetary

Question 1

role of the RBA + main focus

Answer 1

ensure that monetary and banking policy of the bank is directed to the greatest advantage of the people of australia

(main focus: price stability)

Question 2

define cash rate, describe surplus and deficit

Answer 2

cash rate: the cost of borrowing money in the cash market

Surplus: earn interest from the RBA → incentivise them to deposit cash in the cash market

Deficit: charged interest → incentivise them to borrow

Question 3

how does the RBA alter interest rates, lower cash rate, increase cash rate

Answer 3

how does the RBA alter interest rates: by buying and selling Commonwealth Government Securities

how does RBA lower cash rate: increase supply of cash via purchasing CGS

how does RBA increase cash rate: decrease supply of cash via selling CGS

Question 4

tightening and loosening monetary policy

Answer 4

tightening monetary policy: higher interest rate target

loosening monetary policy: lower interest rate target

Question 5

Unconventional monetary policy tool

Answer 5

Forward Guidance

— government stating cash rate target would remain at its lowest possible until progress was made towards full employment and low inflation

— this ensured businesses and consumers were confident that interest rates would remain in place for an extended period

Question 6

transmission mechanism + 2 stages

Answer 6

how the changes in the cash rate affects economic activity and inflation

stage one: how do interest rates respond to changes in cash rate

stage two: how does the change in interest rates impact economic activity and inflation

Question 7

expansionary monetary policy stance

Answer 7

target cash rate is low, stimulating AD, increase inflation, loosening monetary policy

Question 8

contractionary monetary policy stance

Answer 8

target cash rate is high, reducing AD, decrease inflation, tightening monetary policy

Question 9

the stance of monetary policy over the past two years

Answer 9

tightening due to wars in Ukraine, now in contractionary

Question 10

strengths

Answer 10

effective at restraining AD (by tightening - increasing rates)

free from political bias

Question 11

weakness

Answer 11

blunt instrument (cannot target particular sectors of economy)