Monetary policy Flashcards
What is the Monetary policy?
It is a tool used by the Reserve Bank of Australia to stabilize the business cycle.
Key objective of RBA?
price stability, full employment, economic prosperity
Why do they raise rates?
The RBA raises rates to encourage people to SAVE and to spend LESS.
The goal is to control inflation.
Why do they lower rates?
The RBA lowers rates to PROMOTE spending and borrowing money.
What is cash rate?
Cash rate is the interest rate that banks pay to borrow funds from other banks in the money market overnight.
Why do banks borrow money overnight?
Shortage or surplus of cash at the end of the business day. Those with more lend to those with less, maintaining their reserve requirements.
Ensures that the banking system remains stable.
Must banks alter mortgage interest rates when the cash rate changes?
They don’t need to, but they usually align with cash rate. Therefore if cash rate increases, so does mortgage rates.
What is the RBA?
Reserve Bank of Australia
