In this topic you will learn to:
Examine economic issues
Apply economic skills
- apply economic theory to explain how a government could address an economic problem or issue in hypothetical situations
Apply economic skills
- identify limitations of the effectiveness of economic policies
- explain the impact of key economic policies on an economy
You will learn about:
Macroeconomic policies
- rationale for macroeconomic policies – stabilisation and shifts in aggregate demand
- purpose of monetary policy
- implementation of monetary policy by the Reserve Bank of Australia
- impact of changes in interest rates on economic activity and the exchange rate
What is Monetary Policy?
Monetary policy, not to be confused with fiscal policy, is the use of monetary authority to control the supply and availability of money.
HSC 2020 Q1
Which of the following identifies two economic objectives of monetary policy?
A. Price stability and full employment
B. Economic growth and external stability
C. Price stability and distribution of income
D. Economic growth and environmental sustainability
HSC 2017 Q3
Which statement about the time lags associated with government policies is most correct?
A. Fiscal policy has a longer implementation lag than monetary policy.
B. Microeconomic policies have a shorter impact lag than fiscal policy.
C. Monetary policy has a longer impact lag than microeconomic policies.
D. Microeconomic policies have a shorter implementation lag than monetary policy.
Which of the following identifies two economic objectives of monetary policy?
A. Price stability and full employment
B. Economic growth and external stability
C. Price stability and distribution of income
D. Economic growth and environmental sustainability
HSC 2017 Q3
Which statement about the time lags associated with government policies is most correct?
A. Fiscal policy has a longer implementation lag than monetary policy.
B. Microeconomic policies have a shorter impact lag than fiscal policy.
C. Monetary policy has a longer impact lag than microeconomic policies.
D. Microeconomic policies have a shorter implementation lag than monetary policy.
What is the Role of Monetary Policy?
What effect does government monetary policy have on our economies? And for how long? Watch Macat's short video for a great introduction to Milton Friedman's The Role of Monetary Policy, one of the most important economics papers ever written.
HSC 2020 Q2
Which international organisation is responsible for maintaining financial stability in global financial markets?
A. World Bank
B. World Trade Organisation
C. International Monetary Fund
D. Asia–Pacific Economic Cooperation
HSC 2017 Q4
An economy is experiencing high unemployment and an inflation rate below the central bank’s target rate.
Which macroeconomic policy mix is best for this economy?
A. Expansionary fiscal and monetary policy
B. Contractionary fiscal and monetary policy
C. Expansionary fiscal and contractionary monetary policy
D. Contractionary fiscal and expansionary monetary policy
Which international organisation is responsible for maintaining financial stability in global financial markets?
A. World Bank
B. World Trade Organisation
C. International Monetary Fund
D. Asia–Pacific Economic Cooperation
HSC 2017 Q4
An economy is experiencing high unemployment and an inflation rate below the central bank’s target rate.
Which macroeconomic policy mix is best for this economy?
A. Expansionary fiscal and monetary policy
B. Contractionary fiscal and monetary policy
C. Expansionary fiscal and contractionary monetary policy
D. Contractionary fiscal and expansionary monetary policy
What is the Role of Monetary Policy in Australia?
The Reserve Bank of Australia is responsible for Australia's monetary policy. Its monetary policy objective is defined as an ‘inflation target’ of consumer price inflation of 2–3 per cent, on average, over the medium term. To meet this, the Bank influences interest rates in the economy by setting a target for ‘the cash rate’. Influencing interest rates in this way affects the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.
HSC 2019 Question 24 (10 marks)
Use the table to answer part (b) of this question.
Discuss your answer as a group before scrolling down to the sample answer.
Use the table to answer part (b) of this question.
Discuss your answer as a group before scrolling down to the sample answer.
(b) Justify an appropriate monetary policy stance for this economy. Support your answer with reference to the economic indicators provided. 4 marks
Monetary policy stance ...................................................................................
Monetary policy stance ...................................................................................
Sample answer:
Stance: Tighten Monetary Policy
The economy is experiencing growth above the ideal rate, as indicated by increasing high inflation, rapidly falling unemployment and increase in CAD (as a % of GDP). The increased cash rate will reduce aggregate demand, decreasing output hence slowing employment growth. This will also decrease inflationary pressures. The slower growth will also reduce demand for imports and stabilise the cyclical part of the CAD.
Answers could include:
•Contractionary stance
•Change in the cash rate and interest rates
•Economic growth, price stability, full employment, external stability
•Phillips curve/NAIRU and other relationships between indicators
•Transmission channels of monetary policy.
Expansionary policy could be incorporated with relevant justification using the hypothetical data.
Stance: Tighten Monetary Policy
The economy is experiencing growth above the ideal rate, as indicated by increasing high inflation, rapidly falling unemployment and increase in CAD (as a % of GDP). The increased cash rate will reduce aggregate demand, decreasing output hence slowing employment growth. This will also decrease inflationary pressures. The slower growth will also reduce demand for imports and stabilise the cyclical part of the CAD.
Answers could include:
•Contractionary stance
•Change in the cash rate and interest rates
•Economic growth, price stability, full employment, external stability
•Phillips curve/NAIRU and other relationships between indicators
•Transmission channels of monetary policy.
Expansionary policy could be incorporated with relevant justification using the hypothetical data.
"What is Monetary Policy?" from the RBA
Here's a preview, download the file below:
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Using the class text and RBA resources:
- Explain how interest rates are determined.
- Explore modern monetary policy and its repercussions for macroeconomic policy makers.
- Explain how the policy corridor affects Commonwealth Securities.