Monetary Policy Flashcards
what are the 3 financial markets that are intermediary between those who have surplus funds and those who borrow
- loan market
- bond market
- share market
what are the 3 functions of money
- means of exhcange
- unit of measurement
- store of value
what are nominal and what are real interest rates
- nominal: headlined rate not adjusted for rate of inflation
- real: nominal - inflation
what are the 3 objectives of MP
1, price stability (inflation targeting)
- maintenance of full employment
- econ prosperity and welfare of population
what does inflation targetting do
lowers inflation and promotes econ growth
what are headline measures of inflation and what is udnerlying
- headline: CPI excludes volatile items (oil prices and seasonl factors)
- underlying: trimmed mean and weighted median
how is MP implemented
through conventional monetary policy: cash rate dictated by RBA for commercial banks
when does RBA board meet and how much do they usually change Cash rate by
first tues every month
0.25 points
what is a neutral MP stance
cash rate of 3-4%
real rate required to bring full employment and stable inflation of medium run
what are the 4 transmission mechanism pathways
- return on saving and cost of borrowing
- cash flow of hosueholds and firms
- Asset prices and percieved wealth
- ER
in a contractionary/tightening stance what happens to the 4 transmission mechanisms
- increased incentive to save and reduced to spend = investment falls
- reduce cash flow to houses (rise in mortage = less discretionary spending)
(firms less money to invest if loan payments high) - make alternative financial assets (shares/property) less attractive
- AUD appreciates as capital inflow increases, exports more expense
draw AE and AD/AS model for contractionary stance
ve
in a expansionary/easing stance what happens to the 4 transmission mechanisms
- reduces incentive to save and increase incentive to borrow and invest
- fall in mortgage so more discretionary spending, firms more money to invest
- percieved wealth increases
- AUD depreciates and exports more comp
draw AE and AD/AS model for expansionary stance
INCREAM
what are the 5 strengths of MP
- Flexible: decision/implementation lags are short and no gov involvement
- Free of Political Sway
- More effective in Boom Periods: high interest rates have more direct effect than fiscal
- Link between interest rates and Exchange rates
- Subtle Transmission Routes (direct but in secret)
