Warning

focus on monetary policy and what it’s meant to achieve, do not veer off into talkign about the rest of the economy

Discuss the contemporary monetary policy setting of the Reserve Bank of Australia with reference to the busienss cycle the intended effects on key economic sectors and it's effectiveness in influencing aggregate demand.

Monetary Policy is th way in which the Reserve Bank of Australia manipulates, Aggregate Demand, Inflation, and Employment. It does this through the conventional “Main tool of Fiscal Policy”, the Cash Rate, which currently sits at 4.1%

Monetary Policy is the way in which the Reserve Bank of Australia, an independant entity with the Objectives of; Achieving Price Stability (Stable Inflation), Maintaining a level of Full employment, and Economic Prosperity and Wellbeing for the country of Australia, can influence the levels of Employment, Inflation, and Aggregate Demand. They do this through the Main tool of Fiscal Policy; the Interbank Overnight Cash Rate, or Cash Rate for short. Currently the Cash Rate is 4.1%, though that has not been the case over the contemporary period, in 2020, as a result of COVID lockdowns in By June 2020 the economy entered a trough, unemployment spiked to 7.5%, inflation dropped to -0.3, Monetary Policy entered an expansionary stance, going to the lowest rate ever at 0.10%, this was maintained

Monetary Policy effects the economy through a process known as “The Transmission Mechanism”, seperated into two “stages” it describes how changes in the Cash Rate Target flow through to other types of Interest, and then how those flow through the “Transmission Channels” to finally impact Aggregate Demand, levels of employment, Inflation, and Output. The Interbank Overnight Cash Rate Target is set by the RBA, it indicates the desired interest rate the RBA will attempt to achieve within the “Overnight Money Market” through the utilisation of Open market operations. This market mainly consists of banks and other ADIs who create demand for these funds, and the RBA controls the supply of funds.

The Transmission Mechanism is the process by which changes in the Cash Rate Target flow through to influence Aggregate Demand, and thus Employment, Inflation, and Economic Output. It is seperated into two stages, the first consists of the Overnight Money market where ADIs, predominantly banks, create demand for funds, which the RBA controls the supply of through the Cash Rate Target. The second stage consists of the four Transmission Mechanism Channels, that is “Savings and Investment Incentives”, “Cash Flow”, and “Asset Prices”, whom Influence Consumption & Investment, as well as the “Exchange Rate” which influences Net Exports, both of these have a direct impact on Aggregate Demand and by proxy levels of Full Employment, Inflation, and Economic Output. The “Savings and Investment Incentives” channel includes the level

• Setting the Scene (4 marks)
  • Define Monetary Policy
  • Main tool of Monetary Policy (Cash Rate)
  • Current C.R = 4.1%
  • Intended Effects on key economic Sectors (mention policy objectives)
  • When RBA determines their stance they consider the current rates in relation to the targets relevant to their Policy Objectives.
  • Contemporary Stace (2020-Present, past 3 years)
    • Mention 2020:
      • Expansionary Stance (0.1% Cash Rate)
      • COVID
      • High Unemployment, the economy was in a Trough
      • Dont mention it too much, it’s mostly been contractionary
    • May 2022 to present
      • Contractionary Stance
        • Justify; Increased Inflation, Increased Cash Rate
        • Supply Shortage due to
          • Ukraine
          • Floods in Eastern States
          • COVID leading to shortages
        • Mention Budget Deficit in the past as proof.
• Intended Effects (Transmission Mechanism) 6 marks
  • Define Transmission Mechanism
    • Basic Definition ^a6f2b3
      • Basic definition of Overnight Money Market, just mention that it creates demand for funds, that the RBA can control the supply for
  • Mention how it it will effect;
    • Aggregate Demand
    • Full Employment
    • Employment
  • With reference to the most recent stance, that being the contractionary stance we’ve been in for a year and a half.
• Model on Intended Effects (5 marks)
  • AD/AS Model, or;
  • AE Model
  • See Figure 13.6 for examples on the A.E and A.D/A.S models
• Effectiveness (Demonstrate Strengths and Weaknesses of Monetary Policy) 5 marks focus on monetary policy and what it’s meant to achieve, do not veer off into talkign about the rest of the economy
  • Mention how monetary policy is usually more effective during a boom
    • This is due to it’s influence over consumer & business, expectations, and thus influence over Aggregate Demand.
    • however, current inflationary pressure is caused by supply-side factors, thus it may not be as effective.
      • Ukraine
      • Floods
      • COVID
  • Generally the Exchange Rate Channel is effective, however;
    • There is a very low exchange rate currently despite the contrctionary Stance.
    • (Depreciated Recently)
  • Can’t target specific sectors.
  • Conflicting Policy Objectives
    • Currently (*contemporarily) Fiscal & Monetary Policy are working in different directions.

In 2020 we were approaching a Budget Surplus, and the cash rate was in the RBA’s ”target zone”. Until March, when COVID lockdowns occured, unemployment skyrocketed to 7.0% by May, well above the full employment target, thus we saw a change in the cash rate from it’s stable rate of 2.10% within the target zone down to 0.1%, the lowest Cash Rate in history. This held through to