Monetary Policy in Australia Notes

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Monetary Policy

Monetary policy is a macroeconomic policy implemented by the RBA to attain a set of objectives through the basis of a stable and maintained inflation band of 2-3%. Indirectly by the implementation of monetary policy, supply of money is affected through changes in the interest rate; cost of living is methodically altered to suit chosen economic conditions and economic growth is steadied and sometimes purposely stagnated.

There are two different directions for monetary policy to move, that is in a contractionary manner or an expansionary one. The implementation of contractionary monetary policy is indicative of a slowdown in economic growth due to a rise in the cash rate, whereas an expansionary policy would lead to increased growth from a reduction of the cash rate.

Since 2008 the RBA have been implementing a contractionary monetary stance, raising the cash rate by 1.75% at a level of 4.75%, and are expected to maintain this position in upcoming months. The implementation of monetary policy is determined by a range of factors consisting of things like economic growth, employment, external stability, consumer confidence, and of course, inflationary pressures.

One of the factors contributing to an influence of monetary policy is the level of the Australian dollar (currently at approximately $1.05 US). If a contractionary level of monetary policy were to be implemented, the Australian dollar would appreciate significantly, thus depleting our international competitiveness further and leading to external instability; figures show that exports have decreased by 8.7% while imports increased by 1.3% due to a high dollar making it cheaper to purchase.

A key factor to this is Australia’s external stability and global economic conditions; for example the debt crisis in Greece, acting as a potential contagion of global downturn, the US economy’s debt burden is also a negative impact towards global conditions. The key impact however to...
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