FINS1612 Chapter Notes - Chapter 9: Business Cycle, Money Supply, Risk-Free Interest Rate

• School: UNSW, UNSW Sydney
• Department: Finance
• Course: FINS1612
• Professor: Apro J Zein, Mr AB Balogh, Mr W Fan

Document Summary

In most developed economies, monetary policy is directly aimed at influencing interest rates . By understanding what causes central banks to alter policy allows financial market participants to anticipate changes (in policy) & allow lenders & borrowers to make better informed decisions. A central bank may increase interest rates if; excessive inflation, excessive growth in gdp, cad deficit, excessive growth in debt & credit levels & excessive depreciation in the domestic currency. The flow on effects will be; an eventual increase in long term rates, slower consumer spending (lower inflation & imports), an improvement in the cad. & an increased amount of foreign investment inflows causing an appreciation in the currency. The 3 effects of changes in interest rates are: liquidity effect affect of the rba"s market operations (cgs"s, repo"s, currency swaps)on money supply & system liquidity. Income effect is a flow on effect from the initial liquidity effect on interest rates.