Monetary Policy Flashcards
What is the purpose of monetary policy?
The RBA, alongside the Federal Government, attempts to achieve the following objectives:
* full employment
* price stability
* external balance
* sustainable economic growth
high standards of living.
Explain how a change in the cash rate impacts the circular flow
A change in the cash rate has a major flow on affect to the circular flow. For example, when the cash rate is changed, interest rates either increase or decrease, which then affects aggregate demand and consumer spending.
Identify the inflation target rate of the Reserve Bank Australia (RBA)
The usual ideal target rate for inflation is 2-4%, although, the Reserve Bank Australia has a more precise target rate of 2-3%.
Explain the purpose of contractionary monetary policy
- Contractionary monetary policy is implemented to reduce inflationary pressures.
- When an economy is overheating and inflation has broken the
2–3% target, the RBA is likely to increase the cash rate to curb demand. - Contractionary monetary policies aim to reduce spending by increasing the cash rate and reducing the money supply and effectively increasing the cost of borrowing.
Explain the purpose of expansionary monetary policy
- Expansionary monetary policy is implemented to stimulate the economy and demand.
- When economic activity is low and inflation is below the 2–3% target, the RBA is likely to decrease the cash rate to stimulate demand and increase economic activity.
- Expansionary monetary policies aim to stimulate spending by decreasing the cash rate and increasing the money supply, effectively reducing the cost of borrowing.
What are the limitations of monetary policy?
- Monetary policy can be implemented faster than fiscal policy, but takes longer to have an effect.
- There are time lags associated with the implementation of monetary policy.
- Lags depend on how long it takes other interest rates to change and the time it takes businesses and consumers to make decisions.
