Monetary Policy

Topics: Monetary policy, Inflation, Interest rate Pages: 3 (1166 words) Published: August 31, 2013
Monetary Policy involves actions by the RBA on behalf of the govt to influence the cost and availability of money and credit in the economy. It is a macro-economic policy that is pre-emptive and counter cyclical, meaning that it smoothes the effects of fluctuations in the business cycle, and influence the level of economic activity, inflation and employment. The aim of Monetary Policy is too stabilize the currency of Australia, maintaining full employment, maintaining low inflation, and minimizing fluctuations and create economic prosperity, along with increasing the overall wellbeing of Australia's population. Along with this, is keeping inflation within a target of 2-3%, MP is conducted by the RBA, without direct control from the govt. The RBA is Australia's central bank and the 'bank's' bank. The RBA is also the only organization that can print money and has some degree of control over the supply of money. The RBA controls Monetary Policy through interest rates and Domestic Mkt. operations. The cash rate at this point in time is ________, which represents the market interest rate on overnight funds. The RBA keeps control on the cash rate through its financial market operations and it functions as the policy instrument. The RBA's Domestic Market Operations (DMO) (also known as "open market operations") are used to keep the cash rate set as close as possible to that set of the board, by managing the supply of funds available to banks in the money market. More specifically, the RBA buy and sell second-hand Commonwealth Govt. Securities (CGS) in order to influence the cash rate and the general level of interest rates. If the Reserve Bank supplies more exchange settlement funds than the commercial banks wish to hold, the banks will try to shed funds by lending more in the cash market, resulting in a tendency for the cash rate to fall. Conversely, if the Reserve Bank supplies less than banks wish to hold, they will respond by trying to borrow more in the cash...
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