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MONETARY POLICY
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RBA action to influence interest rates and subsequently economic activity.
DMO influences the cash rate initially and consequently general interest rates.
Goals of RBA – Full employment, currency stability, economic growth and prosperity
Inflation Targeting - 2%-3% target over the business cycle to create low inflationary
sustainable economic growth.
Indicators used by the RBA- inflation expectations, current inflation, wages growth, economic
growth, U, current interest rates, exchange rate, Balance of Payments, Monetary aggregates.
The cash rate increased from 3% in 2009 to 4.25% in 2012 and then decreased to 2.25% in
2013…why?
1) What is DMO?
2) Why is monetary policy important?
3) Explain how loose monetary policy impacts on the economy.
4) Explain how tight monetary policy impacts on the economy.
5) What is meant by policy mix?
6) Explain why monetary policy concentrates on low inflation.
7) What are exchange settlement accounts?
8) What is the short-term money market?
9) What is the cash rate?
10) Why does monetary policy depend on the sale or purchase of second hand CGS?
What is a repurchase agreement?
11) How does the RBA raise the cash rate? Why would the RBA want to raise the cash rate?
12) How does the RBA lower the cash rate? Why would the RBA want to lower the cash rate?
13) Copy 15.1 into your notes and learn it
14) What would the RBA do if there was an over supply of funds in the short-term money market
and they wanted to keep the cash rate stable? Think about this- the RBA carries out an adjusting
process every day depending on the quantity of funds available to the financial sector.
15) Use a flow diagram to illustrate the transmission mechanism if the RBA wishes to increase the
rate of economic growth and fight unemployment.
16) Use a flow diagram to illustrate the transmission mechanism if the RBA wishes to decrease the
rate of economic growth and fight inflation
17) Draw a Keynesian diagram to illustrate an expansionary monetary policy stance.
18) Describe how the stance of monetary policy has changed over the last 5 years.
19) What impact could a lower cash rate have on the Australian Dollar?
20) How does the Australian government plan to achieve low inflationary sustainable economic
growth? Discuss the role of Monetary Policy and Fiscal Policy. Complete the table on the next
page.
Monetary Policy
Advantages
Disadvantages
Fiscal Policy