U4 AOS1 Budgetary and monetary policy

Question 1

Monetary policy

Answer 1

Monetary policy is operated by the RBA who have the role of altering interest rates to modify the cost, availability, and demand for credit. It is designed to countercyclically regulate the level of AD and economic activity.

Question 2

Budgetary policy

Answer 2

An aggregate demand measure relating to the changes in anticipated levels and composition of government revenues and expenses for the upcoming year. Budgetary policy is the responsibility of the government and Treasury regarding fiscal policy.

Question 3

Countercyclical

Answer 3

Countercyclical policy is designed to inhibit or stimulate aggregate demand to smooth the business cycle; this may be to reduce the severity of a downturn, avoid recessions and reduce the excesses of a boom. The RBA can also run a countercyclical procedure for the same reasons.

Question 4

Pro-cyclical policy

Answer 4

Undesired changes in policy which increase economic instability due to weaknesses of implementation, recognition, impact etc. They are the opposite of countercyclical and can aggravate the undesirable business cycle consequences (as mentioned above).

Question 5

Short-term money market

Answer 5

A specialist financial institution where money is borrowed and lent for short periods. In this market, RBA market operations affect the supply of cash and, in doing so, influence the cash rate.

Question 6

Open market operations

Answer 6

Also known as the overnight money market, open market operations relate to the strategies of the RBA in the short-term money market involving the sale or repurchase of government securities or bonds with the aim of pushing up or lowering the cash rate.

Question 7

Government capital spending

Answer 7

Abbreviated as G2, includes government spending in the budget which facilitate the production of goods and services for the community.