Monetary Policy

Question 1

What is monetary policy?

Answer 1

The government’s plan for using the money supply to influence economic outcomes.

Question 2

How does the reserve bank use money to supply to control inflation?

Answer 2

They first set an inflation target. (1%-3%)

Increase OCR (official cash rates) which increase interest rates.

Affects AD

Question 3

If interest rates increase…

Answer 3

Then C decreases because credit spending is more expensive and saving is more attractive.

Therefore , investment decreases because borrowing for investment is less profitable

Question 4

If OCR (official cash rates) increase, what happens to interest rates? And what does that mean ?

Answer 4

Interest rates increase, which means credit spending increases, more expensive to spend , more attractive to save.

Question 5

If i (interest rates) increase, EXCHANGE RATES also increase, why?

Answer 5

Because the interest rate differential makes the NZ dollar more attractive to over seas markets and increase the demand.

Question 6

Exchange rates increase which means imported goods are now cheaper, what does this mean for AS ?

Which shift is bigger AD or AS, and why?

Answer 6

Because the exchange rate has increased, the cost of importing goods has decreased, this means that cost of production will decrease.

AS curve shifts to the right to indicate an increase.

AS shift is smaller than AD shift as AS only concerns imported materials whereas AD concerns a change in C , I ,X , and M