Transmission mechanism - HSC ECONOMICS (1 Viewer)
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Kirsty Xx
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Explains how changes in the stance of monetary policy pass through the economy to influence economic objectives such as inflation and economic growth.
edit: This should be in the Economics forum, btw.
edit: This should be in the Economics forum, btw.
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conics2008
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wtf are all these words you guys are using..
I have never heard of these words and I do economics.
LoL ...
just stick to automatic stabilisers n GDP ( not GWP)
I have never heard of these words and I do economics.
LoL ...
just stick to automatic stabilisers n GDP ( not GWP)
nandayo
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Generally the complex stuff is from Bulmer's 'Updated Economics' which gives you a million times more information than you need and this results in you going down an economic spiral of volatile interest, self-doubt and despair.conics2008 said:
conics2008
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^^ you know what stuff economics all together... stuff this im happy with a 80 in this subject..
transition mechanism describes how interest rates affects certain aspects of the economy (firms) then affecting something else (consumers) and then something else.. the something else.. and so on. it is under time lags - limitations of monetary policym000 said:What is transmission mechanism?
Does it just mean that manipulation of interest rates have effect upon economic activity?
seano77
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Transmission policy is the way something is carried out. The way an action, for example monetary or fiscal policy, gets carried out or transmitted. For example the purchase and sale of commonwealth government securities is the transmission mechanism for manipulating the overnight cash rate in domestic market operations. For fiscal policy, the transmission mechanism can be seen through the budget and altering levels of expenditure and taxation. Its not about effects on consumers or firms or inflation etc.
Transmission mechanisms are the effects a tightening/loosening of monetary policy has on aggregate demand and thus economic growth
The inter-temporal substitution effect refers to how interest-sensitive forms of spending ie those which require large amounts of credit are either postponed or brought forward in anticipation of a rate rise/ cut respectively
eg. If you wanted to buy a car, you would need to take out a large loan. If you anticipate interest rates to rise you would wait for a while until they fell to borrow and thus buy the car.
This is the most widely noted example of transmission mechanisms. Others include the reduction in real household wealth, reduction in business confidence and an increased marginal propensity to save
The inter-temporal substitution effect refers to how interest-sensitive forms of spending ie those which require large amounts of credit are either postponed or brought forward in anticipation of a rate rise/ cut respectively
eg. If you wanted to buy a car, you would need to take out a large loan. If you anticipate interest rates to rise you would wait for a while until they fell to borrow and thus buy the car.
This is the most widely noted example of transmission mechanisms. Others include the reduction in real household wealth, reduction in business confidence and an increased marginal propensity to save
The transmission mechanism describes the process of how changes in interest rates work to slow inflation and regulate economic activity. for example, higher interst rates slow demand inflation and economic activity in three main ways:
1. the spending effect - higher interest rates slow inflation by lowering spending (AD) and increasing saving. as a result, both C and I are deferred. this slows AD and economic activity, removes shortages of goods and services, and hence reduced demand inflation.
2. the exchange rate effect - higher interest rates tend to slow inflation by discouraging spending on imports, thereby causing an appreciation in the exchange rate. this makes the cost of producing imports locally cheaper, as imported components are now cheaper because of the favourable or high exchange rate of the $AUD.
3. the effect on inflationary expectations - higher interest rates can reduce inflationary expectations. they can signal to savers, borrowers and investors that the RBA is serious and will ease inflation. it affects peoples perceptions before they take necessary action to protect their real incomes from the effects of rising prices, and before there is speculation in assets. the RBA's transparency in monetary policy is also a factor that reduces inflationary expectations, as it is widely known about, reported on during news on tv and radio, features prominently in the papers and in RBA statements each month, which inform the people of what the RBA plans to do, before they can make assumptions and take action (for example asking for wage rises not meeting inflation rate = more inflation)
1. the spending effect - higher interest rates slow inflation by lowering spending (AD) and increasing saving. as a result, both C and I are deferred. this slows AD and economic activity, removes shortages of goods and services, and hence reduced demand inflation.
2. the exchange rate effect - higher interest rates tend to slow inflation by discouraging spending on imports, thereby causing an appreciation in the exchange rate. this makes the cost of producing imports locally cheaper, as imported components are now cheaper because of the favourable or high exchange rate of the $AUD.
3. the effect on inflationary expectations - higher interest rates can reduce inflationary expectations. they can signal to savers, borrowers and investors that the RBA is serious and will ease inflation. it affects peoples perceptions before they take necessary action to protect their real incomes from the effects of rising prices, and before there is speculation in assets. the RBA's transparency in monetary policy is also a factor that reduces inflationary expectations, as it is widely known about, reported on during news on tv and radio, features prominently in the papers and in RBA statements each month, which inform the people of what the RBA plans to do, before they can make assumptions and take action (for example asking for wage rises not meeting inflation rate = more inflation)
chaldoking
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How a rise/fall in interest rates affects the consumption and investment of households and business.sasa-o8 said:
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