Monetary policy/ Govt policy

Policy Targets Agreement

The formal agreement between the Governer of the Reserve Bank and the Minister of Finance which outlines specific monetary policy such as keeping inflationary rates at low levels, and creating economic growth.

Impacts of inflation on households

Households face increased cost of living and reduced purchasing power, leading to financial stress and potential budget adjustments.

Impacts of inflation on firms

Firms may experience increased production costs due to higher input prices, leading to reduced profit margins and potential layoffs, while also adjusting prices for consumers.

Impacts of a raised OCR on the foreign exchange market

A raised Official Cash Rate (OCR) typically leads to an appreciation of the domestic currency, as higher interest rates attract foreign investment, therefore leading to a reduction in cost of imported raw materials, and export receipts.

Impact of a raised OCR on the AS/AD model

A raised OCR causes increased interest rates, therfore leading to a reduction in aggregate demand as borrowing and spending becomes less affordable. Raised interest rates create an increase in supply, as imported raw materials become more affordable and businesses can maintain production levels despite reduced demand.

How does the government reduce Aggregate Demand?

Increasing income taxes, encouraging saving, reducing government expenditure, increasing the core-funding ratio, allowing a high exchange rate, and placing controls on the availability of credit.

How does the government increase aggregate supply?

Improving productivity, allowing a high exchange rate to reduce COP, setting controls on wages, legislating for labour market chnges that give employers more control on wages, and increased spending on research and development.