Monetary Policy - Australian Economics

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MONETARY POLICY
Intro-
MP alongside FP is a major policy instrument of the govt’s macroeconomic management to maintain a sustainable rate of eco growth, promote eco prosperity and welfare for the Aust economy. •Define MP

MP is implemented by RBA (which is independent of govt. influence) •Outline key objectives of MP
Para 1-
MP plays a counter-cyclical role in the Aust economy (changes in stance are used to smooth out fluctuations in output over the business cycle.) oI.e. MP is used pre-emptively to prevent excessive inflation and other eco objectives etc during booms that reduce competitiveness and living standards. ➢E.g. during 2002-2008, RBA raised cash rate 12 times to 7.25% due to higher levels of inflation caused by the strength of Aust economy and higher global prices. oDraw GRAPH (IMPACT OF MACRO POLICIES)

Para 2-
Primary goal of MP is inflation (i.e. maintaining inflation target of 2-3% over the course of the eco cycle.) •MP is particularly suited with fighting inflation as inflation often associated with monetary factors. •By dealing with inflation, this also enables the govt to achieve its other eco policy objectives of price stability, full employment and sustainable eco growth. •Conflicting eco objectives- however the govt faces a trade off between low inflation/low unemployment as low inflation increases unemployment and high inflation decreases unemployment. GRAPH (PHILLIPS CURVE OF INFLATION/UNEMPLOYMENT) Para 3-

MP is implemented through the RBA’s use of market operations in the cash market; with the cash rate being its main instrument. oDefine cash rate
Explain how cash rate is set by the forces of supply/demand, but the RBA can increase/decrease the supply of funds in the money market through DMO’s; thus targeting the cash rate. •Explain how RBA affects ES accounts.

Para 4-
If the RBA wants to tighten its stance of MP as it did during 2010 because of rising headline inflation rate over 3%, then it...
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