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Monetary Policy - Australian Economics

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Monetary Policy - Australian Economics
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.) o I.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. o Draw 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. o Define 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%,
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