monetary policies

Monetary Policy

Managed by the RBA, it involves changing interest rates based on economic conditions.

Interest Rates

The reward for saving and the cost of borrowing.

RBA Independence

The Reserve Bank of Australia operates independently of the government.

Role of the RBA

To implement monetary policy, maintain financial system stability, and issue the nation's currency.

RBA Goals

Stability of currency, maintenance of full employment, and economic prosperity and welfare of the people.

Conventional Monetary Policy

Focuses on targeting the cash rate to influence interest rates.

Overnight Money Market

The market where banks borrow and lend to each other to settle exchange settlement accounts.

Exchange Settlement Accounts

Accounts that all commercial banks must hold with the RBA to settle transactions.

Cash Rate Target (CRT)

The interest rate target set by the RBA that influences other interest rates.

Deposit Rate

The floor interest rate paid by the RBA to banks with surplus funds in their ES accounts.

Lending Rate

The ceiling interest rate charged by the RBA to banks with deficit funds in their ES accounts.

Unconventional Monetary Policy

Tools used by the RBA alongside conventional policy to achieve macroeconomic goals.

Forward Guidance

RBA's communication about future interest rate changes and monetary policy settings.

Expansionary Monetary Policy

Aims to increase aggregate demand by decreasing the cash rate.

Contractionary Monetary Policy

Aims to decrease aggregate demand by increasing the cash rate.

Neutral Monetary Policy

A state where interest rates neither encourage nor discourage spending or borrowing.

Transmission Mechanisms

Channels through which monetary policy impacts aggregate demand.

Savings and Investment

The relationship between the cost of credit and decisions to save or borrow.

Cash Flow

The effect of interest rate changes on households and businesses with existing debt.

Exchange Rate

Influenced by relative interest rates, affecting demand for currency and international trade.

Asset Prices

Interest rates impact the prices of assets, influencing the wealth effect on households.

Strengths of Monetary Policy

No political bias, short implementation lag, and no financial constraints.

Weaknesses of Monetary Policy

Long impact lag, bluntness in targeting, and potential for asset bubbles and high household debt.