23115 Chapter Notes - Chapter 29: Nominal Interest Rate, Fiscal Policy, Demand Curve
Monetary and fiscal Policy
Monetary Policy
Money supply consists of currency and current deposits (Ms = Cp + D)
Australia’s RBA operates independently of the government, determining monetary policy and
acting as a guarantor of stability in the banking system
The money marker determines the nominal interest rate
(r), in which the money supply is fixed by the central bank
and money demand reflects preference for liquidity,
influenced by income, interest rates and prices.
Money Supply curve is vertical as changes in interest
rates do not affect MS, which is fixed by the RBA
Money Demand curve is downward sloping as a fall in
interest rates increase the quantity of money demanded
The RBA may shift the AD curve via monetary policy (money supply), specifically through the cash
rate.
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Document Summary
Money supply consists of currency and current deposits (ms = cp + d) Australia"s rba operates independently of the government, determining monetary policy and acting as a guarantor of stability in the banking system. The money marker determines the nominal interest rate (r), in which the money supply is xed by the central bank and money demand re ects preference for liquidity, in uenced by income, interest rates and prices. Money supply curve is vertical as changes in interest rates do not affect ms, which is xed by the rba. Money demand curve is downward sloping as a fall in interest rates increase the quantity of money demanded. The rba may shift the ad curve via monetary policy (money supply), speci cally through the cash rate. The rba"s current approach is in ation targeting, aimed at 2-3%. Tight monetary policy: interest rates increase, reducing investment and consumption, slowing eg.
