Monetary Policy Flashcards
What does CPI stand for?
Consumer price index
What is CPI?
CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services.
Examples of CPI?
transportation, food and medical care
How is CPI calculated?
calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
What is deflation?
A decline in general price level in the economy.
What is the function of money?
- Medium of exchange
- Unit of account
- Standard of deferred payment
- Store of value
What is the five criteria of medium of exchange?
- Scarce
- Uniform in quantity
- Durable
- Portable
- Divisible
What is commodity money?
Commodity money is a good used as money that also has its intrinsic value (gold, sea shells, salt)
What are the negatives of commodity money?
- may deteriorate over time for example commodities like like tobacco, wheat.
- May degrade for example gold
- Heavy/bulk to carry like gold
- storing commodities has opportunity costs for example wheat.
What is an opportunity cost?
the loss of other alternatives when one alternative is chosen.
What are the pros and cons of bank notes
- can be converted to coins
- today bank notes are not redeemable to gold. (fiat money)
What is fiat money?
money usually issued by the central bank that has value because the law says so
What are the Money supply aggregates (M1 and M3)?
M1 accounts for moneu supply which includes all currency (paper money and coins) in circulation, plus the value of all demand deposits in banks.
M3 Accounts for M1 and all other deposits with domestic and foreign owned banks operating in australia. (includes term deposits and other authorised deposit - taking institutions.)
what does broad money account for?
Broad money accounts for M3, plus deposits into non-bank financial intermediaries such as finance companies and money market companies and cash management trusts
What are financial markets?
platforms where the supply of funds and demand for funds are coordinated. market is a facility that allows trading
what are financial intermediaries
Financial intermediaries act as go betweens for borrowers and leaders
What are 2 examples of financial intermediaries?
banks and non banks intermediaries: managed funds, superannuation funds and insurance companies
what are the functions of intermediaries?
- cover mismatch
- risk sharing/management
- liquidity - the ease with which financial securities (shares, bonds) can be exchanged for cash
- specialization on collecting information (e.g. returns, credit worthiness).
What are reserves?
deposits that a bank keeps as cash in its vault
what is a reserve ratio?
a banks ratio of reserves to deposits
What is the monetary policy?
The use of monetary tools by the central bank to pursue macroeconomic objectives.
What is the central bank of Australia
the Reserve bank of Australia
What are the objectives of the monetary policy?
- Stability of the currency of Australia
- Maintenance of full employment
- Economic prosperity and welfare
What does omo stand for?
Open market operation
What is OMO?
the purchase or sales of Commonwealth government securities by the RBA to influence the interest rates and money supply by controlling the cash rate
