1. Macroeconomic Policy
A- Monetary Policy Goals- The goal of monetary policy in A/a is to keep inflation (as measured by % growth in the CPI) between 2 and 3 % over the course of the business cycle.p 419 With a low and stable inflation rate the RBA believes that Economic Growth will be higher Unemployment lower

2. Overnight Cash Rate Overnight Cash Rate or Cash Rate-p 419
The interest rate that large scale borrowers( including banks) in the financial markets must pay to borrow funds overnight .
Its value influences all other interest rates in the financial system and thereby its value influences al interest rates throughout the entire economy.
It is by this influence on the interest rates in the wider economy that the RBA seeks to affect Aggregate Demand, and ultimately influence the rate of inflation.

3. How Monetary Policy affects prices, output and employment
The basis of the monetary policy transmission mechanism.
Change in Monetary policy
Change in the supply of liquidity to the financial system
Change in interest rate
Change in investment, interest-sensitive consumption and net exports
Change in aggregate demand
Change in prices ,real GDP and employment
Ref.417
Open Market Operations ref. p 420

4. Open Market Operation RBA Banks decrease Banks increase loans Banks
loans and reduce and create money
money
RBA
RBA sells govt securities,
Banks lose reserve deposits at the RBA, and interest rates rise
RBA buys, govt securities Banks gain reserve deposits at the RBA ,
And interest rates drop
BANKS
Banks
Public
PUBLIC

5. Open Market Operations
The buying and selling of government securities by the central bank to the private sector financial markets to bring about changes to the Monetary base and the Cash Rate p 419
A detailed explanation of the STMM can be found in
Reserve Bank Bulletin-June 1991
Authorised Short Term Money Market Dealers

6. Monetarism-The Velocity of Money MV=PQ
Velocity of Money – the average number of times per period a dollar of the money supply is spent on final goods and services.
If nominal GDP= $400 billion and M1 = $ 100 billion therefore mv=pq $ 100 billion x V = $ 400 billion. Therefore V = 4.
Assume that velocity of money and real output are fairly constant then Changes in M must bring about changes in P.
According to the quantity theory of money any change in the money supply must lead to a proportional change in the price level . ref.423 ,424, 425

7. Quantum Theory of Money in the 21st Century
The Quantum Theory mirrored 19th Century economic conditions
Major upheavals in Great Depression, oil shock of the 1970’s , the GFEC- events cause unemployment, or cost push inflation.
With mass unemployment, increases in money supply will increase output without increase in price levels.
Whilst empirical evidence suggests V is not always constant over time and full employment is not constant over time, nevertheless monetarists believe there is a close correlation between M and P over time. P 424, 425

8. Monetarists arguments against Interventionist Approach
Interventionist Approach- The CB adjusts money supply in time to control swings in economic Cycle
Milton Friedman Approach – p. 431
Because of
1)Information Lag-delay in accessing info of econ. activity out in the real world.
2) Policy Determination Lag-time taken to determine policy response.
3) Policy Effectiveness Lag- time between policy implementation and economic outcome.

9. Milton Friedman Theory Contd
Therefore it is very difficult to finetune and time countercyclical policy and may cause more extreme swings in economic activity.
Therefore CB must follow a predictable monetary policy i.e. control the money supply and set growth in line with real GDP growth rate + desired inflation rate. P. 432

10. Modern Monetary Policy Implementation
Since 1993 the RBA has set inflation target at 2-3% and uses Overnight Cash Rate-at pre-announced level as its main instrument .
The OCR is the interest rate that banks charge one another for borrowing which influences all rates throughout the economy, which influences Aggregate Demand and rate of inflation.
To influence the cash rate ,the RBA carries out Open Market Operations in the private sector money markets to alter the liquidity in the economy. p419

11. Foreign Exchange Market Operations
ref. 433, 434
Australia deregulated exchange rate in 1983 and now subject to normal market procedure.
RBA may intervene if market volatile
The Aussie Dollar is one of the most highly traded currencies in the world and fluctuate widely, e.g.2001 –US $0.49, –US$

12. Global Financial Economic Crisis 2008-2009
Pp 405,406
Pp 434, 435, 436
Word Doc. “Monetary policy is directly responsible----”

13. Macroeconomic Policy
B- Fiscal Policy=Is the use of government spending and taxes and their influence on the nation’s economic growth, employment and price level.
Discretionary Fiscal Policy-the deliberate use of Changes in Govt. spending and/or taxes to alter Aggregate Demand and stabilise the economy’s business cycle p. 443
Other Roles of Fiscal Policy p 459
Prior to 1936 classical economists dominated economic thinking, based on Adam Smith Competitive Markets –will bring all markets into equilibrium i.e. forces of supply and demand would achieve full employment and markets will always clear enabling firms to sell all goods and services offered for sale. P. 346

14. Keynes’ Theory
John Maynard Keynes – The General Theory of Employment ,Interest and Money p 346, 347
Keynes believed that over a long period Aggregate Expenditure can be inadequate to gain full employment. P.350
Take measures to increase Aggregate Demand to counteract recession Increase government expenditure, increase in AD, increase in price level and real GDP p. 444, 446
Take measures to decrease Aggregate Demand to counteract inflation. Decrease Government Expenditure , decrease AD, fall in prices . P. 447
During GFEC Australian government used fiscal measures to stimulate employment –pink bats, school halls-running a huge budget deficit.

15. Automatic Stabilisers
Automatic Stabilisers- p. 450, 451
Federal expenditure and tax revenue that automatically change over the course of the business cycle in such a way as to help stabilise an economic expansion or contraction.
When economy contracts (recession) unemployment increases and government expenditure on unemployment benefits increases .At the same time tax revenue will decrease- deficit budget
When economy expands (inflation) employment increases, and government expenditure on unemployment benefits decreases, whilst your tax revenue increases-surplus budget.