Strengths and Weaknessess

Question 1

what are the 5 strengths

Answer 1

1. flexible
2. free of political sway
3. more effective in booms
4. links to ER
5. subtle transmission routes

Question 2

how is MP flexible

Answer 2

• RBA meets monthly so decision lag i sshort

- decisions made without need for gov authorisation

Question 3

why is MP more effective in booms

Answer 3

contractionary MP better than FP as higher IR’s have more direct impact on spending decisions

Question 4

what are the 3 weaknesses

Answer 4

1. time lags
2. less effective in contraction
3. blunt policy instrument

Question 5

wht are the 3 types of time lags and which one is the worst

Answer 5

1. recognition lag
2. decision lag
3. action/effect lag: long as transmission chain from policy to impact on AE is long

Question 6

why is MP less effective in a contraction

Answer 6

• doesnt stimulate priv spending as 2/4 transmission chains dont react
• businesses dont necesarily borrow more if they arent confident
• confidence influences asset prices