The Main Objectives Of Monetary Policy - 843 Words

The main objectives of Monetary Policy (RBA, 2016) are: †¢ stability of the currency of Australia; †¢ the maintenance of full employment in Australia; †¢ and the economic prosperity and welfare of the people of Australia. To satisfy these objectives, the bank and the federal government together decided in October 2013, that the inflation target is to be kept within an average of 2-3% (RBA, 2016). The Reserve Bank of Australia seeks to and can in effect, control/influence inflation by monitoring the cash rate, which is reviewed and set all months bar January. The cash rate is the main tool of Monetary Policy. In a weak economic environment, the RBA will lower the cash rate to stimulate the economy to increase economic activity. And it is expected that the intermediaries will pass the cuts on in reduction of interests’ rates. Lowered interests rates increase the demand for borrowing and frees up disposable income for consumption (demand for goods and services), ie consumers have more money to spend. When consumer spending is high, there is more money available for business, and in turn employee wages; employment rates are better. When this demand starts to outweigh supply (both for goods and labour), market forces began to result in the prices for goods/services and labour to rise and it is this rise in prices for goods/services that is inflation. Lowering the cash rate to lower borrowing costs also influences businesses, freeing up cash flow, encouraging them to borrow andShow MoreRelatedHow Central Banking Independence With Monetary And Fiscal Policy Essay1557 Words   |  7 Pag esResearch question: How central banking independence with monetary and fiscal policy leads to control the inflation rate. 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