Shorter Summary

Question 1

Expansionary stance

Answer 1

Used to lower cash rate/interest rates (by RBA) when;
Economy is growing below the long run average rate of growth (< 3%)
Actual GDP is below potential GDP
Unemployment is above natural rate (> 5%)
Inflation below target (< 2%)
Negative aggregate demand shock

Question 2

Contractionary stance

Answer 2

Economy growing too fast (> 4%)
Actual GDP above potential GDP
Unemployment is below natural rate (< 5%)
Inflation is below the target rate (> 3%)
Economy is hit by a positive aggregate demand shock

Question 3

Neutral stance

Answer 3

Neither stimulatory or contractionary when setting interest rates

Question 4

Transmission mechanism

Answer 4

How changes in I.R’s affect the level of economic activity in the economy
Leading to changes into private spending, employment and prices

Question 5

Changes in interest rates effect:

Answer 5

1. Saving and investment decisions
2. Cash flow of HH and firms
3. Wealth and asset prices
4. The exchange rate

Question 6

What is monetary policy

Answer 6

Refers to the interest rate decisions taken by the RBA to effect monetary and financial conditions within the economy
Monetary policy is a more important tool than fiscal policy due to its flexibly and how it’s not subject to political bias

Question 7

Three main objectives

1. Price stability

Answer 7

Ideal at 2-3%, helps people plan purchases and form decisions (consumer spending, property purchasing, investment and confidence)
Maintaining stability to avoid a financial crisis

Question 8

2. Full employment

Answer 8

Full productivity
Therefore makes the economy efficient
Problem -> multiplier

Question 9

3. Economic propensity/welfare of people in Australia

Answer 9

Able to consume more, greater utility and greater standards of living

Question 10

When the economy is in a boom phase, RBA changes the cash rate to

Answer 10

A contractionary stance

Relating to raising the cash rate and stance is said to tighten

Question 11

When the economy is in an recessionary phase, RBA changes the cash rate to

Answer 11

Expansionary stance

Relating to lowering the cash rate and stance is said to ease

Question 12

When economic activity is high.. interest rates rise..

Answer 12

Trying to contract economic activity so I.R’s are forced up through tight monetary policy

Question 13

What occurs when economic activity is high

Answer 13

High use of consumer credit
Demand for money increases
Businesses increase their capital expenditure due to the high demand for goods and services

Question 14

When economic activity is low… interest rates lower…

Answer 14

Trying to increase E.A, government borrows funds meaning there is extra liquidity within the economy and interest rates will fall

Question 15

What occurs when economic activity is low

Answer 15

Demand for borrowing money decreases
Inflation increases, therefore interest rates will increase to get the same real rate of return
Banks lend money to overseas investor to increase interest rates

Question 16

Contemporary monetary policy

Answer 16

2014 onwards - we’ve been in an expansionary stance
Recovering from monetary policy and collapse in ToT
Chinese economy slowing down -> contributes to our fall in commodities
Unemployment has risen over the years

Question 17

Strengths of monetary policy

Answer 17

Flexible - can be implemented when the RBA feel like it needs to be
Greater political neutrality - independent of the govt
Effective during boom periods
Effective under floating E.R’s - cuts in I.R leads to falls in capital inflow, reducing demand for currency leading to a depreciation

Question 18

Weaknesses of monetary policy

Answer 18

Suffers from time lags (recognition, decision, action/implementation) -> changes to economic conditions, time to make decision
Less effective during recessions/contractions
Blunt policy instrument - cannot be used to target particular sectors/industries of the economy

Question 19

Cost of high inflation

Answer 19

Rise in unemployment

Stagnant economy