How the Rba Uses Dmo to Affect the Level of Economic Activity in Australia?

Topics: Inflation, Money supply, Monetary policy Pages: 2 (716 words) Published: August 18, 2013
The RBA (Reserve Bank of Australia) whom is Australia’s central bank are accountable for the implementation of monetary policies using DMO ( Domestic Market operations) within Australia.This Is achieved by tightening or loosening the monetary policy through the purchasing and selling of Repos (Repurchase agreements) and CGS (Commonwealth Government Securities).This is generally done to have a positive effect on economic activity for the purposes of reducing inflationary pressures or to overcome recession within the Australian economy.

The initial action that will be performed by the RBA will be to ascertain the current status of the Australian economy this is done once a month when they have a meeting and discuss where they want the Australian economy to move .If they reach the decision where the economy needs to tighten monetary policy they will follow a few steps first the RBA will sell 2nd hand securities init the short term money market which then forces the bank to buy these securities using their exchange settlement funds.These funds are kept in accounts at the Reserve Bank by ADIs and are utilised by RBA to assist in controlling the supply of ES funds. In this case they will decrease after they are used to settle the accounts. Following this decrease the RBA will be forced to rise the value of money through the interest rate (cash rate). Subsequent to this banks and financial institutions will choose to pass on the rate rise to the public. Then causing aggregate demand to fall as a result of a decrease in consumer confidence which means business’s and and consumers spending or output of money decreases slowing down economic activity which usually leads to fall in employment Although this will see Government debt decrease which results in a rise in welfare. This will have a concluding result being that inflationary pressure be reduced as a result of the tightening of the monetary policy through DMO. This is was evident through the GFC in Australia when...
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