Lecture 10_money_2009

Lecture 10_money_2009 - Credit creation summary: Animated...

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Slide 1 Credit creation summary: Animated slide (10 secs per slide) These slides cycle through but cannot be printed individually
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Slide 2 The Money Market The combination of the money demand and money supply determines the equilibrium interest rate The interest rate represents the opportunity cost of holding money balances
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Slide 3 Money market equilibrium Money supply determined by RBA & banks and assumed constant Equilibrium (nominal) interest rate where Md = Ms Md is downward sloping reflecting the opportunity cost of holding money in a current account (that carries zero interest) as opposed to holding it in an ‘account’ that carries an interest rate equal to r
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Slide 4 Interest rate rise Increase in money GDP. Notice this could be caused by inflation and/or a rise in RGDP Reduction in Ms – monetary policy A fall in r could be caused by a reduction in Md or an increase in Ms
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Slide 5 So? How does this does this all fit in in our broader course? First we studied determination of rGDP and U via the AE model with GPL constant. . …as well as associated 4- sector multiplier. . …which could be triggered by E ‘shocks’. . …or fiscal policy. . …and then looked at it all again but dropped the constant GPL assumption.
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Slide 6 So? How does this does this all fit in? Last lecture developed link between money GDP and Md. . …which for a given Ms. . …determines r.. …which in turn feeds back into the AE model and . . …back to rGDP, U and GPL.
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Slide 7 This lecture Monetary policy Policy process Policy implementation Transmission mechanisms Effectiveness
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Slide 8 The Australian Financial System Comprised of: The Reserve Bank of Australia (RBA) The banks Financial intermediaries
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Slide 9 The Reserve Bank of Australia (RBA) Responsibilities set out in the Reserve Bank Act 1959 Main functions: Control of note issue Banker to the Banks Exchange Settlement Accounts (ESAs)
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Slide 10 The Reserve Bank of Australia (RBA) (cont.) Main functions (cont.): Banker to the Government Day-to-day government banking vital role in financing government deficits Management of the international means of payment Implementation of monetary policy Plus other subsidiary functions e.g. regulation of the payment system, membership of various regulatory boards and authorities Not considered in this course
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Slide 11 RBA balance sheet Exchange Settlement Accounts (ESA) Government cheque accounts RBA manages BOP Used in Open Market Operations for policy purposes See Table 11.1, page 397 of text Balance sheet reflects RBA’s functions
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Slide 12 Monetary policy purpose - RBA Act Since 1993, RBA has thought these are best achieved by setting a target for consumer price
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Lecture 10_money_2009 - Credit creation summary: Animated...

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