Monetary policy test

Question 1

What is Monetary Policy

Answer 1

Policy actions the RBA undertakes to influence the cost and availability of money in Australia (cash rate). The RBA is independent of government.

Question 2

What are the impacts of increasing interest rates

Answer 2

• Slower economic growth
• Higher unemployment as central banks are trying to get consumers to spend less,
• blunt tool which affects everyone (not specific to groups)

Question 3

How is monetary policy used to curb inflation (what is the cash rate)

Answer 3

Cash rate increase will influence other interest rates through exchange settlement accounts with the RBA which will in turn banks will passed on to consumers, giving them more or less money to consume or invest in the economy.

Question 4

How does the cash rate affect other interest rates and the economy (transmission mechanism)

Answer 4

Financial institutions wish to maintain profit margins so they will increase their rates and pass it on to consumers, affecting especially home mortgages and savings accounts.

Question 5

What is inflation targeting

Answer 5

Since the 90s RBA has targeted 2-3% inflation in the economy. Used to stabilise the overall economy, establishing expectations of low inflation and price stability, increasing consumer confidence.

Question 6

What is contractionary monetary policy

Answer 6

• RBA wishes to lower economic activity

- Increase interest rates which lowers disposable income for households lowering consumption, investment, employment

Question 7

What is expansionary monetary policy

Answer 7

• RBA wishes to increase economic activity (e.g. pandemic)

- lower interest rates to increase investment, consumption, employment, inflation