Monetary Policy

Question 1

monetary policy

Answer 1

actions by the RBA to affect monetary and financial conditions in the economy by affecting the price of money and credit
cash rate –> interest rates –> price of money/credit

Question 2

objectives

Answer 2

stability of currency
maintaining full employment
economic prosperity ands welfare of the people of Australia

Question 3

financial market

Answer 3

act as in intermediator between savers and investors (borrowers and lenders of funds)

Question 4

financial institutions

Answer 4

banks
building society's
finace companies 
merchant banks 
credit unions

Question 5

loan market

Answer 5

firms borrow money to buy capital equipment
households barrow to buy houses and cars
banks, credit unions, finace companies

Question 6

bonds market

Answer 6

firms are government sells bonds to raise finace
fixed interest security
main method of finace a budget deficit

Question 7

share market

Answer 7

firms can obtain finace by issuing new shares on the stock market

Question 8

functions of money

Answer 8

means of exchange
unit of measurement
store of value

Question 9

cash rate

Answer 9

the overnight lending rate between banks

the cost of lending financial assets between the central bank and other banks or among themselves

Question 10

interest rates

Answer 10

the costs of lending/borrowing between the bank and another entity (personal or business)
represent the price of credit and the reward of saving

Question 11

nominal interest rates

Answer 11

rates that have not been adjusted for the expected inflation rate

Question 12

real interest rates

Answer 12

the nominal rate - expected inflation rate

*more important when it comes to determining economic decisions involving borrowing and saving

Question 13

primary market operations

Answer 13

availability of credit (money supply)

price of credit (interest rates)

Question 14

components affected by a change in interest rates

Answer 14

saving and investment decisions
the cash flow of households and firms
wealth and assets prices
the exchange rate

Question 15

saving or investment decisions

Answer 15

IR–> price of borrowing/incentive to save

–> economic activity

Question 16

cash flow

Answer 16

IR –> amount of disposable income –> economic activity

Question 17

wealth and assets

Answer 17

IR –> attractiveness of shares VS. bonds

Question 18

exchange rates

Answer 18

IR –> attractiveness of the economy to invest (return rate) –> supply/demand of AUD

Question 19

contractiony stance

Answer 19

upwards movement of CR and restricting money supply

aimed at restricting the level of disposable income

Question 20

expansionary stance

Answer 20

downward movement of CR and expanding money supply

aimed at expanding the level of disposable income

Question 21

neutral stance

Answer 21

the policy rate required to bring about full employment and stable inflation
nominal cash rate adjusted for inflation

Question 22

strengths

Answer 22

targets C, (X - M), and I
fixability and speed (debated daily, limited recognition, decision and implementation lag)
independent authority 
effective in booms  
interest rates effected (capital inflow)
demand of currency changes

Question 23

weaknesses

Answer 23

effect lag (long time as it is indirectly moving through the economy) 
fairly ineffective in a downswing/trough/recession
blunt policy instrument (one size fits all)

Question 24

why wont the monetary policy work

2011 - …

Answer 24

existing debt (post GFC)
subdued wages and earnings
high AUD
baby boomers retiring
tighter financial controls  
low CR = low confidence

Question 25

unconventional monetary policy definition

Answer 25

occurs when tools other than changing a policy interest rate are used

Question 26

examples of unconventional monetary policy

Answer 26

quantitative easing (QE)
term funding facility (TFF)
forward guidance
negative interest rates

Question 27

negative interest rates

Answer 27

being charged by you bank to deposit money - extreme disincentive to save

Question 28

forward guidance

Answer 28

communication of the stance of MP

manages and sets expectations

Question 29

quantitative easing

Answer 29

asset purchasing
the outright purchasing of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’
“printing money” increasing the supply of money making it easier to lend money and reduces the incentive to save
increased D for bonds decrease yield (because price of the bond increases)

Question 30

Term funding facility

Answer 30

3-year funding for approved deposit taking institutions at 0.25%
increases the confidence to lend money
reduced the costs for businesses and low income households
‘subsides the cost of borrowing’