topic 5 Flashcards
(37 cards)
Roles of the RBA
- being the banker to commercial banks (through ESA)
- being the banker to the government
- control and distribution of AUD
- custody of Australia’s gold and foreign currency
- supervision of the payments system ensuring the economic fluidity
- stabilising economic activity (targeting inflation)
Aims of RBA
- price stability (managing inflation)
- “full” employment maintenance (managing U/E)
- gap removal (acts counter-cyclically)
What does printing money do?
printing money without increasing output will only increase inflation because the same amount of output will be worth more and so each would be worth a higher price
What is monetary policy?
the control of the quantity of money available in an economy and the channels by which new money is supplied
- monetary is more useful in + gaps
- fiscal is more useful in - gaps
What are the impacts of inflation?
- reduces consumers’ purchasing power of money over medium term
- decreases ‘real’ value of household assets
- decreases ‘real’ value of household income
- increases firms costs
What is interest?
the factor income for the factor of production called Capital through:
- return for lending capital
- reward for saving
- cost of borrowing
What is an interest rate?
annual percentage % return paid by borrowers and received by lenders
REAL interest rate = nominal rate - inflation
How do increasing interest rates affect AD?
less disposable income therefore less consumption (demand pull)
companies borrow less money therefore less investment (demand pull and cost push)
gov uses money to fund deficits
since saving rewards with higher interest returns, foreigners store money in AUS bank accounts and the AUD value increases
since AUD has increased in value, exports are more expensive, therefore less exports and more imports
Debt Statistics
- avg household debt is 185% of disposable income ($260,000)
- AUS is $3.4T in debt ($3T from mortgages, $200B from personal loans and $55B from credit cards)
- government is in debt $800B + net interest rate of 3%
What is the cash rate?
the rate the RBA charges banks for loans within the RBA reserve system. It is a key base interest rate and all other interest rates are derived from it (rate at which banks lend to each other in the cash market)
directly proportional to banks’ interest rates
How are interest rates decided from the cash rate?
first step = cash rate
second step = risk assessment (varies)
third step = profit
What is an ESA
Exchange Settlement account are accounts provided by the RBA to facilitate financial transactions between banks.
- Banks only keep the minimum amount (credit balance) of money in ESA’s otherwise they want interest by investing.
- This money is used for the banks to level up at the end of the day.
- the money supply in the RBA should be constant (if it isn’t, the cash rate will change and the RBA will sell and buy REPOS from them to regain control)
ESA functions
for payment system (banker to banker)
- RBA nets the transactions daily and transfers the net balance
for economic stability (cash market)
What is a REPO
is a form of short-term borrowing for dealers in government securities –> open market regulations (control cash rate)
Natural REPOS
- pensions add money (sell repos right)
- taxes take away money (buys repos left)
What is the RBA’s corridor annoucement?
corridor makes banks think they are getting a choice so they settle in the middle of the higher and lower 25 basis points for lending and borrowing
When does the cash rate change?
when there are new expectations and demand changes although supply stays the same price increases
What affects Inflation?
Demand pull (increase demand increase prices)
Import inflation
Cost push (decrease supply increase prices)
Expectations (expect INF = buy now and higher wages)
What are the benefits of market operations?
- RBA has control over supply
- independant of politics
- flexible and precise and fast
- easily reversible
What is easing monetary policy?
when the RBA lowers the cash rate to stimulate AD
What is tightening monetary policy?
when the RBA raises the cash rate to control AD and inflation
What are the financial markets?
network of markets and financial intermediary institutions that facilitate the flow of funds between various economic sectors
What is the role and most important factors of financial markets?
ROLE: channel funds from savers (surplus funds) to borrowers (shortage funds)
Risk –> most important aspect for investors
Control –> most important aspect for borrowers
What is Direct finance?
flow of funds directly between multiple lender to borrows (e.g silicon valley). It is very difficult because you must match
- dollar amount
- risk tolerance of lender vs borrower
- return desired vs willing to be paid
- maturity (time)
