Yr 11: Monetary Policy, Inflation & the AUD (Concepts) Flashcards
What was the cash rate prior to the pandemic in 2019?
0.75%
What did the RBA change the cash rate to during the pandemic?
0.1%
What did the RBA change the cash rate to in 2023?
4.1%
How did the RBA conduct unconventional monetary policy during the pandemic?
They reduced the bond yield on Government bonds by conducting:
1) Forward guidance
2) Asset purchases
Why is the bond yield curve upward sloping?
If lenders expect interest rates to rise in the future, they will charge higher interest rates on longer-term loans to make up for the opportunity cost of lending at a higher interest rate in the future
Why did forward guidance reduce the interest rate on government bonds?
By creating expectations that interest rates won’t increase over the next 3 years, lenders didn’t charge a higher interest rate on loans over that period
Why did asset purchases reduce the interest rate on government bonds?
By printing money and buying government bonds, the RBA increased the price of government bonds which squeezed down the yield earned as interest on those bonds
Why did reducing the bond yield on government bonds reduce interest rates throughout the economy?
The interest rate on lending to the Australian Government is considered a risk-free rate, so all other interest rates are equivalent to the government bond rate plus an extra risk premium
How much money did the RBA print to spend on asset purchases during the pandemic?
$281 billion
What was inflation in Australia prior to the pandemic?
It had been between 1.5-2% since 2015
What happened to inflation during the pandemic?
It fell to -0.3%
What has happened to inflation in 2023?
It has spiked to 7.8%
Why did inflation fall in the pandemic?
1) Consumption and aggregate demand fell due to lockdowns
2) The government fully subsidised child care temporarily, making the price of childcare fall from around $100 per day to $0
Why did inflation spike so much in 2022 and 2023?
1) Global supply chain disruptions
2) Russian sanctions
3) Floods
4) The recovery in consumption following the end of restrictions and lockdowns
5) Expansionary macroeconomic policies
6) Unemployment is low, so wages are starting to rise and increase inflation even more
What are supply chain disruptions and why have they affected inflation?
Due to covid, there have been disruptions to the production of inputs (such as computer chips) and the transportation of goods between countries, which have increased business costs
What are Russia sanctions and why have they affected inflation?
Due to Russia’s invasion of Ukraine, most countries have stopped buying Russian exports. This has reduced the supply of commodities such as oil, increasing input costs
Why have floods affected inflation?
By destroying farm production, supply of food products fell causing prices to rise
Why is low unemployment likely to increase inflation even more?
When unemployment is low, workers are able to negotiate higher wages (because firms are competing with each other to attract the scarce labour), pushing up firms’ costs
How well has the government managed inflation?
The recent spike in inflation is mostly due to cost inflation that the government can’t control. However, it has been made worse because fiscal and monetary policy was so loose in the pandemic and was not tightened quickly enough.
In which year did the mining boom start?
2003
In which year did the AUD peak in value during the mining boom?
2011
What was the % change in the value of AUD between 2003 and 2011?
55% increase
What was the % change in the value of the AUD between 2011 and 2022?
35% decrease
Why did the AUD rise between 2003-2011?
There was an increase in demand for the AUD because of rising foreign investment into Australian mining firms. Firms needed this investment to expand mines and build new transport infrastructure, in response to high global demand and prices of commodities
Why did the AUD fall between 2011-2015?
There was a decrease in demand for the AUD because the level of financial investment into mining firms had finished expanding the mines and building new infrastructure
How well has the RBA used monetary policy to stabilise the business cycle?
The RBA used record-low interest rates and unconventional monetary policy to dramatically support growth, employment and inflation in the pandemic.
However, the RBA was too slow in reversing its expansionary monetary policy. This has contributed to the recent spike in inflation (although other factors have also contributed to the spike as well)
