Unit 4 AOS 1 Monetary Policy Flashcards
What is the consumer price index (CPI)
= determination of change in prices of g/s purchased by Aus households through collection of “basket” where weightings are applied 2 categories of the basket relative 2 importance in household
What is the goal of low inflation
= 2 achieve a sustained inc in general lvl of prices of b/n 2-3% on average over medium term
What is CPI headline
= capture price movements of all g/s in the CPI
-> referred 2 as headline rate of inflation
What is CPI underlying
= CPI headline excluding “volatile items” of fruit, veg and fuel
What are the consequences of high inflation
- Purchasing power eroded
- Resource misallocation
- dec international competitiveness
- Redistributive effects
- Savings + investment
What are the consequences of low inflation
1) C’er delay purchasing as expect prices 2 fall
-> dec C t/f dec AD
2) Bus confidence dec t/f dec I + laying off of employees inc
What is the role of the RBA
1) Sets the cash rate 4 Aus 4 stability
2) Ensure security of payment system
3) Make + distribute bank notes
4) Deal with gov.t payments
What are the objectives of the RBA
1) focus on achieving low inflation in medium term which should -> SSEG + FE
2) full employment
3) economic prosperity + welfare
(in order of most poignant)
What is monetary policy
= ability 2 manipulate the ‘cash rate’ enables it 2 directly affect all other interest rates
What is the cash rate
= interest rate that applies 2 borrowing + lending in the overnight money markets
What is the overnight / domestic money market
= market in which banks borrow from + lend 2 each other via electronic settlement accounts (ESAs)
What is liquidity, referring to monetary policy
= supply of cash in overnight money markets
-> RBA controls liquidity
How does the RBA change liquidity
1) Buying + selling Commonwealth Government Securities (CGS)
2) or Repurchase Agreements (Repos)
= Open Market Operations (OMO)
What is the cause of increased liquidity
-> inc L = inc supply of cash in money market will buy or purchase “bonds” from banks -> cash flows from RBA 2 the Banks via the OMO, injecting cash into money market = inc liquidity
What is the cause of decreased liquidity
-> dec L = dec supply of cash in money market will sell “bonds” from the banks -> cash flows from banks 2 RBA via OMO, taking cash out of the money market -> dec liquidity
What is loosening of monetary policy
= RBA announcing lower target cash rate @ one of its monthly board meetings. Dec target cash rate = inc L. through OMO in the domestic cash market
-> it is an action taken
What is expansionary monetary stance
= achieved through loosening of monetary policy / dec cash rate. Stimulates AD with incentive 2 borrow + disincentive 2 save = inc C+I t/f inc AD. Inc demand inflationary pressures
What is tightening of monetary policy
= RBA announcing a higher target cash rate @ one of its monthly board meetings. Inc target cash rate = dec L. through OMO in the domestic cash market
-> it is an action taken
What is contractionary monetary policy
= achieved through tightening of monetary policy / inc cash rate. Restricts AD with disincentive 2 borrow + incentive 2 save = dec C+I t/f dec AD. Dec demand inflationary pressures
What is monetary policy neutrality
= situation where lvl of cash rate neither stimulates nor contracts economy. That is, monetary policy is x have expansionary / contractionary effect on economy
Currently, monetary policy neutrality involves a target cash rate of 3.5%
What is an example of the operation of an unconventional monetary policy
-> Forward Guidance
= public commitments made by the RBA as 2 how it will conduct monetary policy in the future. It takes the form of describing the economic conditions the board would look 2 see b4 it would consider raising / lowering the cash rate
What are transmission mechanisms
= the way a change in interest rates affect AD + economic activity + ultimately achievement of low inflation / price stability / stability of currency
What are the specific transmission channels
1) Savings and investment (the cost of credit) channel
2) Cash Flow channel
3) Exchange rate channel
4) Asset price / value channel
How AD is affected in the Savings and investment channel
inc cash rate
- C’ers inc savings + dec spending = dec C t/f dec AD
- C’ers + bus dec borrowing = dec C + I t/f dec AD
dec cash rate
= opposite 4 each
