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HSC Economics > Yr 11: Monetary Policy, Inflation & the AUD > Flashcards

Yr 11: Monetary Policy, Inflation & the AUD Flashcards

1
Q

What is monetary policy?

A

Changes to the interest rates in an economy to stabilise the business cycle

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2
Q

What is the RBA’s objective of monetary policy?

A

To stabilise inflation between 2-3% in order to achieve sustainable economic growth and low unemployment

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3
Q

What is the cash rate?

A

The interest rate on overnight loans between banks’ exchange settlement accounts

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4
Q

What is an exchange settlement account?

A

Banks’ accounts held at the RBA to settle transactions between their customers that occurred that day

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5
Q

What are 2 ways the RBA influence the cash rate?

A

1) Open Market Operations

2) Cash rate corridor

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6
Q

How does the RBA conduct Open Market Operations?

A

To increase the cash rate, the RBA would sell second-hand Commonwealth Government Securities to banks to reduce the supply of funds in their ESAs

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7
Q

If inflation was 4%, would the RBA buy or sell Commonwealth Government Securities?

A

Sell

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8
Q

If inflation was 1%, would the RBA buy or sell Commonwealth Government Securities?

A

Buy

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9
Q

The RBA wants to raise the cash rate. To do this, will they buy or sell Commonwealth Government Securities?

A

Sell

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10
Q

The RBA wants to lower the cash rate. To do this, will they buy or sell Commonwealth Government Securities?

A

Buy

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11
Q

Why does a change in the cash rate lead to a change in other interest rates in the economy?

A

The cash rate is a risk-free interest rate, so the interest rate on all other loans are made up of the cash rate plus a margin for the risk of that loan

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12
Q

Why does a change in interest rates lead to a change in inflation?

A

A change in interest rates flows through the transmission channel to shift aggregate demand and demand inflation

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13
Q

What are the 4 channels of the transmission mechanism?

A

1) Saving and borrowing
2) Mortgage repayments
3) Wealth effect
4) Exchange rate effect

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14
Q

What is the saving and investment channel of the transmission mechanism?

A

If interest rates rise, individuals will save more and consume less. Firms will also borrow less and invest less.

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15
Q

What is the wealth effect channel of the transmission mechanism?

A

If interest rates rise, individuals are less willing to borrow to buy assets such as houses. As a result, asset prices fall. The owners of these assets now feel less wealthy, so are less willing to spend on consumption

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16
Q

What is the mortgage repayment channel of the transmission mechanism?

A

If interest rates rise, the amount people spend paying interest on their mortgage rises. This leaves them with less money to spend on consumption

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17
Q

What is the exchange rate channel of the transmission mechanism?

A

If interest rates rise, foreigners will be more willing to lend to Australians. This increases the demand for the AUD, causing the AUD to appreciate. As a result, imports increase and exports decrease

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18
Q

Why would an increase in interest rates cause the AUD to appreciate?

A

If interest rates rise, foreigners will be more willing to lend to Australians. This increases the demand for the AUD, causing the AUD to appreciate.

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19
Q

The RBA raises the cash rate. Would inflation rise or fall?

A

Fall

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20
Q

The RBA lowers the cash rate. Would inflation rise or fall?

A

Rise

21
Q

The RBA raises the cash rate. Would economic growth rise or fall?

A

Fall

22
Q

The RBA lowers the cash rate. Would economic growth rise or fall?

A

Rise

23
Q

The RBA raises the cash rate. Would the AUD rise or fall?

A

Rise

24
Q

The RBA lowers the cash rate. Would the AUD rise or fall?

A

Fall

25
Q

The RBA buys CGSs. Would inflation rise or fall?

A

Rise

26
Q

The RBA sells CGSs. Would inflation rise or fall?

A

Fall

27
Q

The RBA buys CGSs. Would economic growth rise or fall?

A

Rise

28
Q

The RBA sells CGSs. Would economic growth rise or fall?

A

Fall

29
Q

The RBA buys CGSs. Would the AUD rise or fall?

A

Fall

30
Q

The RBA sells CGSs. Would the AUD rise or fall?

A

Rise

31
Q

What are 3 causes of inflation?

A

1) Demand
2) Cost
3) Government policies

32
Q

What is demand inflation?

A

Increased aggregate demand bids up the price of scarce products

33
Q

What is cost inflation?

A

Higher costs of production mean firms have to charge higher prices for their products

34
Q

How can government policies cause inflation?

A

1) If the government places taxes or removes subsidies on products, then the price of those products will change
2) If the government prints money, then there will be more money chasing the finite resources in the economy, bidding up the price of those products

35
Q

What type of inflation would occur in an upturn in the business cycle?

A

Demand

36
Q

What type of inflation would occur due to a rise in oil prices?

A

Cost

37
Q

What type of inflation would occur due to an increase in the GST?

A

Government policies

38
Q

What type of inflation would occur due to a fall in the cash rate?

A

Demand

39
Q

What type of inflation would occur due to a decrease in income tax?

A

Demand

40
Q

In Year 1, $1 = €3. In Year 2, $1 = €2. The AUD has…

A

Depreciated

41
Q

In Year 1, $1 = €3. In Year 2, $1 = €4. The AUD has…

A

Appreciated

42
Q

In Year 1, $3 = €1. In Year 2, $2 = €1. The AUD has…

A

Appreciated

43
Q

In Year 1, $3 = €1. In Year 2, $4 = €1. The AUD has…

A

Depreciated

44
Q

In Year 1, $1 = €3. In Year 2, $0.50 = €1. The AUD has…

A

Depreciated

45
Q

In Year 1, $1 = €3. In Year 2, $0.25 = €1. The AUD has…

A

Appreciated

46
Q

What are 2 reasons demand for the AUD could increase?

A
  • Increased exports
    • Increased foreign investment into Australia
47
Q

What are 2 reasons supply of the AUD could increase?

A
  • Increased imports
    • Increased foreign investment out of Australia
48
Q

What are 2 impacts of an appreciation of the AUD?

A

1) Imports become cheaper
2) Exports become less competitive (so foreigners buy fewer of them)

49
Q

What are 2 impacts of a depreciation of the AUD?

A

1) Imports become more expensive
2) Exports become more competitive (so foreigners buy more of them)

HSC Economics (39 decks)

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