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The Reserve Bank and the Economy
Terms in this set (17)
How does the reserve bank determine whether there is a new over night cash rate?
The board receives a detailed briefing on current and future state of the economy.
Does a change in monetary policy require there to be a change in the money supply?
What is base money?
Money that is equal to the amount of curreency in circulation plus the deposits that banks have with the Reserve Bank in exchange settlement accounts.
How do banks attempt to increase their exchange settlement deposits?
They offer fewer loans in the overnight cash market.
What does an increase in exchange settlement deposits do to the overnight cash market?
The amount of available funds in the overnight cash market declines.
How do borrowers react to a decrease in available funds in the OCM?
They offer a higher cash interest rate they are willing to pay in order to secure loans.
What does a high cash rate do for the demand for base money?
It makes demand for base money low.
What does a low cash rate do for the demand in base money?
Makes it higher bc banks would rather keep money in exchange settlement accounts.
What happens when the reserve bank announces a higher target cash interest rate?
This means banks wish to transfer funds into their exchange settlement accounts (higher demand for base money)
Can the reserve bank control real interest rates?
Yes. Inflation appears to change the real interest rate by the same amount as the nominal interest rate.
What does the reserves bank stabilisation of planned spending lead to?
A stabilisation of aggregate output and employment as well.
What is significant about the real interest rate, consumption spending and planned investment spending?
Both consumption spending and planned investment spending decline when the real interest rate increases.
How does the Reserve Bank fight a recessionary gap?
The real interest rate should be reduced, stimulating consumption and investment spedning.
What is a policy reaction function?
Something that describes how the action a policy maker takes depends on the state of the economy.
What is the Taylor rule?
It describes the behaviour of the US bank.
According to the taylor rule, what does the Federal reserve resond to?
Both output gaps and rate of inflation.
How does the policy reaction function respond to a contractionary gap?
By lowering the real interest rate
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