Monetary Policy Flashcards
How is contractionary monetary policy implemented
By increasing the cash rate
What will the impact of contractionary monetary policy have on the dollar
Banks will be more attractive to depositors compared to international markets where the interest rates are lower
This increases demand for the Australian dollar, which leads to appreciation of the AUD
What would lead the RBA to implement contractionary monetary policy ?
- Inflation targeting
- Unemployment, growth or output
How does contractionary monetary policy affect net exports
If the AUD increases, exports will fall
Imports will increase as they are cheaper. This reduces net exports
How does contractionary monetary policy affect GDP
Investment falls as the opportunity cost for borrowing falls
Consumption falls as disposable income falls and consumption of durables falls
How does contractionary monetary policy affect the AD curve
AD shifts to the left, employment would be expected to fall
true or false; Maintaining a strong dollar in international currency markets is not one of the monetary policy goals of the Reserve Bank of Australia.
False
The money demand curve is downward sloping because:
lower interest rates cause households and firms to switch from financial assets to money.
If the overnight cash rate falls, then ceteris paribus
interest rates will fall and share prices will rise.
According to the Reserve Bank Act 1959 (Cth), what are the goals of monetary policy?
- price stability
- economic growth
- low unemployment
The Reserve Bank of Australia’s main monetary policy target is:
the inflation rate.
The effect of monetary policy on long-term interest rates is usually:
smaller than its effect on short-term interest rates.
Falling interest rates can
increase a firm’s share price, which causes firms to issue more shares, and thus increases funds for investment.
what are the major functions of the RBA?
maintaining the integrity of the financial system
monitoring credit growth
controlling the cash rate
what characterises the ability of the Reserve Bank of
Australia (RBA) to prevent recessions?
the RBA may be able to keep a recession shorter and milder than it would
otherwise be
how does the RBA increase the cash rate?
it sells government securities to commercial banks. This means the commercial banks reserves will decrease causing the cash rate to increase.
what situations is one in which the Reserve Bank of
Australia will potentially pursue expansionary monetary policy?
potential GDP is forecast to be higher than equilibrium GDP
What is the difference between commodity money and fiat money?
Commodity money is a good used as money that also has value independent of its use as money. Money has four functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. Paper currency is fiat money, which has no value except as money.
what is a barter economy?
an economy that does not use money and in which people trade goods and services directly for other goods and services
what are the functions of money?
It must act as a medium of exchange.
It must serve as a unit of account.
It must serve as a store of value.
It must offer a standard of deferred payment.
what can be accepted as money?
a medium of exchange. at a minimum, be generally accepted as payment to serve as money.
Five criteria make a good suitable for use as a medium of exchange:
The good must be acceptable to (that is, usable by) most people.
It should be of standardised quality so that any two units are identical.
It should be durable so that value is not lost by spoilage.
It should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported.
The medium of exchange should be divisible because different goods are valued differently.
Five criteria make a good suitable for use as a medium of exchange:
The good must be acceptable to (that is, usable by) most people.
It should be of standardised quality so that any two units are identical.
It should be durable so that value is not lost by spoilage.
It should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported.
The medium of exchange should be divisible because different goods are valued differently.
Explain how financial institutions create money.
On a bank’s balance sheet, reserves and loans are assets and deposits are liabilities. Reserves are deposits that the bank has retained, rather than loaned out or invested, which are kept by banks as part of prudential bank management. When a bank accepts a deposit, it keeps only a fraction of the funds as reserves and loans out the remainder. In making a loan, banks increase the bank account balance of the borrower. When the borrower buys something with the funds the bank has loaned, the seller will deposit the payment in a bank. The seller’s bank will keep part of the deposit as reserves and loan out the remainder. This process will continue until no banks have excess reserves. In this way, the process of banks making new loans increases the volume of demand deposit account balances and the money supply
