Role of RBA in determining the cash rate (1 Viewer)

[swagster0906]

Heyy guys soo i have an essay on the role of rba in determining the cash rate and how that influences the interest rate and the level of economic activity.

We are told to incorporate theoretical diagrams in our essay but idk what theoretical diagrams to include. We havent really started this topic yet at school so i'm a bit confused, what diagrams am i meant to include? Could i include a business cycle?

Any help will be greatly appreciated thanks.

 

[RivalryofTroll]

If you want to talk about the counter-cyclical role of monetary policy, the business cycle can be used.

Domestic/Open Market Operations (DMO) diagram - how the RBA influences the supply of cash to control the cash rate. Decreasing supply to increase the cash rate (monetary tightening) and increasing supply to decrease the cash rate (monetary loosening).

Transmission Mechanism:
1. Keynesian (Income-Expenditure) diagram - decrease in cash rate/interest rates --> greater expenditure (via consumption and investment as borrowing becomes cheaper) --> greater levels of economic activity (as reflected in the increase in national income). And vice versa.

2. AD/AS diagram - decrease in cash rate/interest rates --> increased consumption and investment (incentive to borrow is higher) --> increased AD --> greater levels of economic activity (as reflected in the increase in national output). And vice versa.