Objectives of Monetary Policy

Question 1

what are the 3 objectives

Answer 1

1. price stability (inflation of 2-3%)
2. Maintenance of Full Employment
3. Economic Prosperity and Welfare of Population

Question 2

1. what is inflation targetting

Answer 2

RBA targets 2-3% over course of business cycle. works to lower inflation and promote growth

Question 3

1. what are the issues of inflation (unstable price)

Answer 3

• increases uncertainity and encourages investment in non productive assets
• undermines value of currency and reduces value of savinsg
• leads to high interest rates
• if inflation is higher than other countries, AUD apprecaites so exports more expensive

Question 4

2. how does lower inflation help achieve full employment

Answer 4

low inflation promotes business confidence and encourages investment in resources = employment

Question 5

3. how is economic prosperity and population welfare achieved

Answer 5

if 1. and 2. achieved prosperity is achieved

Question 6

3. how is prosperity measured

Answer 6

as an increase in real GDP per capita

Question 7

what is a Headline measure of inflation

Answer 7

CPI = headline measure (exlcudes volatile items). headline data adjusted due to volatile components (oil prices and seasonal factors) which effect inflation

Question 8

what is an underlying measure of inflation

Answer 8

trimmed mean and weighted median. elminates outliers at top and bottom of CPI prices, giving trurer rate of inlfation