Monetary Policy - Monetary Policy-MP is the RBAs main macro policy to influence the cost and availability of funds-MP has limitations as seen through

Monetary Policy - Monetary Policy-MP is the RBAs main macro...

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Monetary Policy -MP is the RBA’s main macro policy to influence the cost and availability of funds -MP has limitations as seen through its medium time lag and ineffectiveness of addressing structural problems, thus eff. in curbing out fluctuations in cycle -In 1992/1993 the RBA introduced inflation targeting which aimed to hold inflation between the 2-3% -Goals of MP 1) Price stability (INF/$) 2) Full employment 3) Prosperity and welfare of AUS people -Calculated through underlying inflation (remove the adverse effects of one of movements in CPI) or headline inflation (Eg cyclone Yasi was increase in CPI) DMO -The RBA influences the cash rate through domestic market operations. It does this through buying/selling second hand gov’t securities -Banks are required to hold ES accounts with the RBA, thus the RBA can influence the money market Eg during periods of unstainable high eco growth the RBA will intervene via tightening MP EG RBA will buy securities causing a surplus of funds in banks ES leading to a decrease in the cash rate Transmission mechanism -The gov’t will affect the level of AGG demand through the mechanism. A higher level of IR will give less incentive to households/businesses to consume and invest in capital equipment -The effect of this can be seen through a shift to the left in the demand curve as AD=C+I+G+(X-M) will decrease -Higher levels of IR will cause increased foreign capital inflows as foreign savings now receive higher returns, this turn will cause a APP in the AUD. Leading to less int. competitiveness of AUS exports and lower imported INF -Overall reduced AD will impact on employment as labour is a derived demand however will aid DPI and CPI. This trade off can be seen through examining the short run Phillips Curve -RBA’s goal of impacting the unemployment is achieve the NAIRU because if UNE were to reach below 4% this would cost push inflation through forcing wages to increase. This can be seen as prior to the GFC UNE was around 4% this saw firms
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