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Economics 3,4 > Unit 4 AOS 1 Monetary Policy > Flashcards

Unit 4 AOS 1 Monetary Policy Flashcards

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1
Q

What is the consumer price index (CPI)

A

= determination of change in prices of g/s purchased by Aus households through collection of “basket” where weightings are applied 2 categories of the basket relative 2 importance in household

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1
Q

What is the goal of low inflation

A

= 2 achieve a sustained inc in general lvl of prices of b/n 2-3% on average over medium term

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2
Q

What is CPI headline

A

= capture price movements of all g/s in the CPI
-> referred 2 as headline rate of inflation

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3
Q

What is CPI underlying

A

= CPI headline excluding “volatile items” of fruit, veg and fuel

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4
Q

What are the consequences of high inflation

A
  • Purchasing power eroded
  • Resource misallocation
  • dec international competitiveness
  • Redistributive effects
  • Savings + investment
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5
Q

What are the consequences of low inflation

A

1) C’er delay purchasing as expect prices 2 fall
-> dec C t/f dec AD
2) Bus confidence dec t/f dec I + laying off of employees inc

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6
Q

What is the role of the RBA

A

1) Sets the cash rate 4 Aus 4 stability
2) Ensure security of payment system
3) Make + distribute bank notes
4) Deal with gov.t payments

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7
Q

What are the objectives of the RBA

A

1) focus on achieving low inflation in medium term which should -> SSEG + FE
2) full employment
3) economic prosperity + welfare
(in order of most poignant)

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8
Q

What is monetary policy

A

= ability 2 manipulate the ‘cash rate’ enables it 2 directly affect all other interest rates

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9
Q

What is the cash rate

A

= interest rate that applies 2 borrowing + lending in the overnight money markets

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10
Q

What is the overnight / domestic money market

A

= market in which banks borrow from + lend 2 each other via electronic settlement accounts (ESAs)

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11
Q

What is liquidity, referring to monetary policy

A

= supply of cash in overnight money markets
-> RBA controls liquidity

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12
Q

How does the RBA change liquidity

A

1) Buying + selling Commonwealth Government Securities (CGS)
2) or Repurchase Agreements (Repos)

= Open Market Operations (OMO)

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13
Q

What is the cause of increased liquidity

A

-> inc L = inc supply of cash in money market will buy or purchase “bonds” from banks -> cash flows from RBA 2 the Banks via the OMO, injecting cash into money market = inc liquidity

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14
Q

What is the cause of decreased liquidity

A

-> dec L = dec supply of cash in money market will sell “bonds” from the banks -> cash flows from banks 2 RBA via OMO, taking cash out of the money market -> dec liquidity

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15
Q

What is loosening of monetary policy

A

= RBA announcing lower target cash rate @ one of its monthly board meetings. Dec target cash rate = inc L. through OMO in the domestic cash market
-> it is an action taken

16
Q

What is expansionary monetary stance

A

= achieved through loosening of monetary policy / dec cash rate. Stimulates AD with incentive 2 borrow + disincentive 2 save = inc C+I t/f inc AD. Inc demand inflationary pressures

17
Q

What is tightening of monetary policy

A

= RBA announcing a higher target cash rate @ one of its monthly board meetings. Inc target cash rate = dec L. through OMO in the domestic cash market
-> it is an action taken

18
Q

What is contractionary monetary policy

A

= achieved through tightening of monetary policy / inc cash rate. Restricts AD with disincentive 2 borrow + incentive 2 save = dec C+I t/f dec AD. Dec demand inflationary pressures

19
Q

What is monetary policy neutrality

A

= situation where lvl of cash rate neither stimulates nor contracts economy. That is, monetary policy is x have expansionary / contractionary effect on economy
Currently, monetary policy neutrality involves a target cash rate of 3.5%

20
Q

What is an example of the operation of an unconventional monetary policy

A

-> Forward Guidance
= public commitments made by the RBA as 2 how it will conduct monetary policy in the future. It takes the form of describing the economic conditions the board would look 2 see b4 it would consider raising / lowering the cash rate

21
Q

What are transmission mechanisms

A

= the way a change in interest rates affect AD + economic activity + ultimately achievement of low inflation / price stability / stability of currency

22
Q

What are the specific transmission channels

A

1) Savings and investment (the cost of credit) channel
2) Cash Flow channel
3) Exchange rate channel
4) Asset price / value channel

23
Q

How AD is affected in the Savings and investment channel

A

inc cash rate
- C’ers inc savings + dec spending = dec C t/f dec AD
- C’ers + bus dec borrowing = dec C + I t/f dec AD

dec cash rate
= opposite 4 each

24
Q

How is AD affected in the Cash Flow channel

A

inc cash rate
- C’ers / bus with varying rate loan -> dec proportion of disp. income available 4 spending -> dec C + dec AD

dec cash rate
= opposite

25
Q

How is AD affected in the exchange rate channel

A

inc cash rate
= appreciating AUD -> dec international competitiveness -> dec X + inc M t/f dec AD

dec cash rate
= depreciating AUD -> opposite

26
Q

How is AD affected in the Asset price / value channel

A

inc cash rate
= dec household borrowing -> dec demand 4 assets -> dec asset prices + household wealth -> dec eco prosperity -> inc C -> inc AD

dec cash rate
= opposite

27
Q

What are the ways in which low inflation stimulates the economy

A

-> long term focussed with impact on inc eco prosperity + L.S
= Inc p. power; inc confidence; inc international competitiveness
All will inc C,I or X, dec M, = inc AD t/f inc AS 2 inc growth t/f inc DD4L

28
Q

What are the strengths of monetary policy

A

1) RBA has independence from political bias / conditions
-> helps in medium 2 long term
2) Short term implementation lag
-> decisions have fast impact
3) Influence on expectations
-> through forward guidance
4) Very effective @ controlling inflation
-> supports achievement of F.E + SSEG

29
Q

What are the weaknesses of monetary policy

A

1) Imprecise / blunt instrument
-> does x discriminate b/n dif sectors
2) Long lag time (recognition + impact)
= estimated 2 be up 2 2yrs
3) No direct control
-> evidenced by rate inc by the commercial banks
4) Less effective in stimulating AD during eco turndown compared 2 B.P
5) M.P can x directly dec inflationary pressures generated from supply side e.g conflict + inc service costs
6) High lvls of indebtedness
= dec effective when high b/c inc focus on “repairing their balance sheet” once I.R falls
7) Aging population
8) Behaviour of commercial banks

Economics 3,4 (6 decks)

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