Quick Question - Monetary Policy (1 Viewer)

[imoO]

hi all, just got a quick question

the RBA is able to influence economic activity through using monetary policy to buy/sell CGS.

is the buying/selling of these CGS the same as influencing the exchange rate to influence economic activity?

cheers

EDIT - i have another question, it was from multiple choice in past paper exams

what would be the effect on the Australian economy if Australia's main trading partners went into recession

From my knowledge, i think that financial flows into Australia would decrease, exports from Australia will decrease(what would happen to imports into Australia?), a decreased level of economic growth over the short term for the Australian economy??

 

[mrhorseham]

exchange rates change as a result of a change in the stance of MP, the current relatively high IRs in Aus relative to O/S has caused an apprec. $A. But to influence exhange rates directly the RBA would buy/sell currency/gold reserves on the forex market to influence supply/demand.

 

[danal353]

hi all, just got a quick question

the RBA is able to influence economic activity through using monetary policy to buy/sell CGS.

is the buying/selling of these CGS the same as influencing the exchange rate to influence economic activity?

cheers

EDIT - i have another question, it was from multiple choice in past paper exams

what would be the effect on the Australian economy if Australia's main trading partners went into recession

From my knowledge, i think that financial flows into Australia would decrease, exports from Australia will decrease(what would happen to imports into Australia?), a decreased level of economic growth over the short term for the Australian economy??

influencing interest rates will indirectly influence the exchange rate. In order to directly influence the exchange the RBA buys/sells aus/foreign currency.

If australia's main trading partners went into recession - yes it would decrease our exports (imports depends on the state of the Aus. economy) and there would effect us negatively in the short term, since we're so integrated into the international business cycle.
NB if our trading partners went into recession, their interest rates would most likely fall, thus Australia would become a more attractive place to invest - leading to an appreciation of the dollar.

 

[gnrlies]

hi all, just got a quick question

the RBA is able to influence economic activity through using monetary policy to buy/sell CGS.

is the buying/selling of these CGS the same as influencing the exchange rate to influence economic activity?

cheers

EDIT - i have another question, it was from multiple choice in past paper exams

what would be the effect on the Australian economy if Australia's main trading partners went into recession

From my knowledge, i think that financial flows into Australia would decrease, exports from Australia will decrease(what would happen to imports into Australia?), a decreased level of economic growth over the short term for the Australian economy??

Hi there

The RBA used to maintain a fixed exchange rate as you should all know. Under these circumstances it is impossible for a central bank to run a monetary policy such as the one we currently run. There are a range of reasons for this, but basically it boils down to the RBA not being able to do two things at once.

Since 1983 the RBA has had a number of different ideologies when it comes to running monetary policy. In the late 80's it did use monetary policy as a tool to overcome external stability concerns. Part of this did have the value of the currency in mind, but no more than perhaps it did in the early 90's. In the early 90's the RBA repositioned monetary policy as being an instrument for output and price stabilisation. This eventually included the movement towards inflation targeting in 1993.

Now I am a little unsure what you mean by:

buying/selling of these CGS the same as influencing the exchange rate to influence economic activity?

Because when we did have a currency whose value was determined by the RBA, it did not really do this. If you would like to explain this further I would be happy to try and explain.


As for your second question:

Yes, trade would be affected

The effect on financial flows would not be obvious. If there was a change, it would probably increase. This is because our trade deficit would widen (due to lower exports) and fewer domestic investment opportunities (along with higher savings) in the nations experiencing a recession.