Money, banks & RBA

Question 1

what is money and its function?

Answer 1

It is an asset that people are willing to receive in exchange for goods.

Question 2

functions of money

Answer 2

• medium of exchange
• unit of account (measuring wealth)
• store of value (easily stored)
• offer standard/ deferred payment (facilities ability to pay overtime).

Question 3

five criteria of a suitable medium of exchange

Answer 3

scarce
uniform 
durable 
portable 
divisble

Question 4

define M1

Answer 4

the narrowest definition composed; currency and the demand deposits with the bank

Question 5

Define M3

Answer 5

M1 plus all other deposit of private non-banker sector with domestic and foreign banks operating

Question 6

Broad money

Answer 6

M3 plus deposit with the non-banking institution; insurance, super

Question 7

Financial system

Answer 7

when supply of funds and demand coordinated

Question 8

Financial intermediaries

Answer 8

• covers mismatch
• risk sharing/mangement
• liquidity- ease finance securities exchange cash
• specialisation on collecting information

Question 9

Monetary Policy

Answer 9

• use of monetary tools by the central bank to pursue macro-economic objectives.

Question 10

objectives macro-economic policy

Answer 10

• employment full
• inflation 2-3
• economic prosperity and welfare

Question 11

explain how an increase in cash rate would impact the components of AD

Answer 11

C- decrease
I- increase
E- decrease
I- increase

Question 12

The instrument of monetary policy

Answer 12

OPO is the purchase or sale of common wealth securities by the RBA to influence interest rate and money supply through cash rate.

• banks shortage of reserves they borrow from other banks
• the interest rate for overnight inter-bank borrowing is the cash rate
• the overnight purchase/sale can increase or decrease reserves
• by increase/decrease of reserve RBA control cash rate

Question 13

Why did the GFC happen?

Answer 13

Poor credit standards and high level of borrowing that people weren’t able to pay back

Question 14

Expansionary monetary policy

Answer 14

decrease the cash rate to increase spending therefore influence GDP

Question 15

Contractionary Monetary policy

Answer 15

increase the cash rate to decrease spending and decrease inflation

Question 16

Cons of contractionary monetary policy

Answer 16

• time lag; the market will take time to adapt to the policy therefore the impact will take time to happen
• technical difficulty; you can only lower the rate to 0 what happens after when the lowering isnt impactful
• impacts the whole country not just certain states

Question 17

Arguments for the RBA be independent

Answer 17

• whenever govet do not have enough tax revenue for spending they sell bonds and RBA mostly buy them. the more the RBA buy more money supply= increased inflation
• govt may use the RBA to win election; decrease interest rate to increase spending and employment which may lead to greater inflation

Question 18

Arguments against the RBA be independent

Answer 18

• in a democracy people vote for those they want to trust to make decisions that impact them. However, the RBA are not elected nonetheless has impact on life of civilians. low key they’re not held accountable for actions.