Monetary Policy

Question 1

What does CPI stand for?

Answer 1

Consumer price index

Question 2

What is CPI?

Answer 2

CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services.

Question 3

Examples of CPI?

Answer 3

transportation, food and medical care

Question 4

How is CPI calculated?

Answer 4

calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Question 5

What is deflation?

Answer 5

A decline in general price level in the economy.

Question 6

What is the function of money?

Answer 6

1. Medium of exchange
2. Unit of account
3. Standard of deferred payment
4. Store of value

Question 7

What is the five criteria of medium of exchange?

Answer 7

1. Scarce
2. Uniform in quantity
3. Durable
4. Portable
5. Divisible

Question 8

What is commodity money?

Answer 8

Commodity money is a good used as money that also has its intrinsic value (gold, sea shells, salt)

Question 9

What are the negatives of commodity money?

Answer 9

• 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.

Question 10

What is an opportunity cost?

Answer 10

the loss of other alternatives when one alternative is chosen.

Question 11

What are the pros and cons of bank notes

Answer 11

• can be converted to coins

- today bank notes are not redeemable to gold. (fiat money)

Question 12

What is fiat money?

Answer 12

money usually issued by the central bank that has value because the law says so

Question 13

What are the Money supply aggregates (M1 and M3)?

Answer 13

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.)

Question 14

what does broad money account for?

Answer 14

Broad money accounts for M3, plus deposits into non-bank financial intermediaries such as finance companies and money market companies and cash management trusts

Question 15

What are financial markets?

Answer 15

platforms where the supply of funds and demand for funds are coordinated. market is a facility that allows trading

Question 16

what are financial intermediaries

Answer 16

Financial intermediaries act as go betweens for borrowers and leaders

Question 17

What are 2 examples of financial intermediaries?

Answer 17

banks and non banks intermediaries: managed funds, superannuation funds and insurance companies

Question 18

what are the functions of intermediaries?

Answer 18

1. cover mismatch
2. risk sharing/management
3. liquidity - the ease with which financial securities (shares, bonds) can be exchanged for cash
4. specialization on collecting information (e.g. returns, credit worthiness).

Question 19

What are reserves?

Answer 19

deposits that a bank keeps as cash in its vault

Question 20

what is a reserve ratio?

Answer 20

a banks ratio of reserves to deposits

Question 21

What is the monetary policy?

Answer 21

The use of monetary tools by the central bank to pursue macroeconomic objectives.

Question 22

What is the central bank of Australia

Answer 22

the Reserve bank of Australia

Question 23

What are the objectives of the monetary policy?

Answer 23

1. Stability of the currency of Australia
2. Maintenance of full employment
3. Economic prosperity and welfare

Question 24

What does omo stand for?

Answer 24

Open market operation

Question 25

What is OMO?

Answer 25

the purchase or sales of Commonwealth government securities by the RBA to influence the interest rates and money supply by controlling the cash rate