Revision & Summary – Monetary Policy

Resource Description

Revision & Summary – Monetary Policy

1. Define the term interest rate.
2. Discuss the role of the Reserve Bank in influencing the cash rate.
3. Outline TWO factors that influence the level of interest rates in Australia.
4. Analyse the impact of an easing in monetary police on the Australian economy.

Macroeconomics

Macroeconomics is the big picture: analysing the economy-wide phenomena such as GROWTH, INFLATION and UNEMPLOYMENT.

The six objectives of macroeconomics are:

• Economic growth and quality of life
• Full employment
• Price stability
• External stability
• Environmental sustainability
• Distribution of income

The two macroeconomic policies conducted by the government to meet the six economic objective are:

FISCAL POLICY ? public spending and taxation used to influence the level of demand in the economy. The budget, government expenditure.

MONETARY POLICY ? involved the setting of the interest rate on overnight or short term loans. Influences economic growth and inflation. The Reserve Bank of Australia (RBA) has delegated authority from the government for Australia’s Monetary Policy.

Interest Rate

The Interest Rate is the price of money.

The BORROWING RATE is the rate of interest offered by financial institutions when you put money in them. E.g. investment.

The LENDING RATE is the rates of interest charged by financial institutions if you use their money. E.g. loans.

The Roles of the Reserve Bank of Australia

• Conducting monetary policy
• Working to maintain a strong financial system
• Issuing of the nation’s banknotes
• Managing Australia’s gold and foreign exchange reserves

Objectives of the Monetary Policy

• The stability of the currency of Australia

• The maintenance of full employment in Australia, and

• The economic prosperity and welfare of the people of Australia

These objectives are achieved through setting inflation between 2-3%, per annum, on average, over the business cycle.

Inflation is the rate of increase for goods and services over time.

The Australian Bureau of Statistics (ABS), who publish inflation every quarter, measures it and its measurement is the Consumer Price Index.

The impact of a lower rate of inflation:

• Can assist in establishing a sound basis for economic growth in the long run.
• A low and stable rate of inflation can help provide an economic environment that is supportive of economic growth, and therefore
• Low rates of unemployment and economic well-being and prosperity.