Monetary/Fiscal + Interest Rates Flashcards
What is monetary policy?
Increasing or decreasing the money supply to speed up or slow down the overall economy
Who runs the monetary policy?
The central bank of a country (RBA)
What is contractionary monetary policy?
Less money supply = higher interest rates = borrowing and spending decreasing
What is expansionary monetary policy?
More money = lower interest rates = borrowing and spending increases
What are the ways to change money supply? (3)
- changing reserve requirement
- changing cash rate
- open market operations
What are open market operations?
When a central bank bus or sells short term government bonds
What is fiscal policy?
Changing government spending or taxes
What is the effect of fiscal policy?
Contracts/expands the economy
What is an interest rate?
The amount charged, expressed as a percentage of the principal, by a lender to a borrower
How is interest both a reward and cost?
Reward- receiving interest in savings/deposits
Cost- paying interest on loans
What are factors that make interest rates vary over time? (4)
- change in supply and demand
- inflation and deflation
- housing market
- wanting to smooth out fluctuations in business cycle
What is a fixed interest rate?
Interest rate charged on loan remains the same over term, no matter what the market does
What is a variable interest rate?
Interest rate on the outstanding balance varies as market interest rates change
What are the advantages of a fixed interest rate? (3)
- borrower always knows how much is due
- helps plan finances
- safeguards against further interest rate rises
What are the disadvantages of a fixed interest rate? (2)
- if interest rates drop, the borrower still pays the higher rate
- hard to obtain from lender due to higher payments
What are the advantages of a variable interest rate? (2)
- can allow you to borrow a larger amount of money if credit is not good
- can lower payment in short term
What are the disadvantages of a variable interest rate? (2)
- risk that the rate could rise
- might not be able to make payment
What is Australia’s central bank?
Reserve Bank of Australia (RBA)
Who is the RBA owned by?
The commonwealth of Australia
When does the RBA meet?
The first Tuesday of the month, except in January
Is the RBA connected to the government?
No, it makes decisions independently of the political process
Who is the current governor of the RBA?
Phillip Lowe
What are the four economic goals of the RBA?
- stability of Australian currency
- maintenance of full employment
- economic prosperity and welfare of the people
- controlling risk and promoting efficiency
What is compound interest?
Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan
What is the cash rate?
The interest rate which banks pay to borrow funds from other banks in the money market on an overnight basis
Who is the cash rate set by?
The RBA
What are surplus funds?
Funds left over from a person’s income which they don’t spend
What are deficit funds?
When someone needs funds they don’t have
What are some reasons to borrow money? (5)
- to buy goods, services and luxury items
- to finance buying a house
- to fund expansions
- to finance deficits
- to loan money to overseas borrowers
What is an example of a short term loan/interest rate?
Using a credit card or taking out a personal loan
What is an example of a long term interest rate?
Fixed rate on a home loan for 20 years
What is the general rule when comparing short and long term interest rates?
Short term interest rates tend to be higher than long term interest rates
