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Flashcards in roles of government Deck (48)
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1

What are the 4 economic goals for any modern economy?

• avoid too much inflation
• achieve full employment
• achieve sustainable economic growth-economic prosperity
• achieve a stable currency & strong international payments
position

2

do banks need capital reserves to operate?

yes the reserves are set by law or convention

3

monetary policy

it is concerned with control of amount of money in circulation i.e. money supply & its growth

4

what is the purpose of monetary policy and how does it try to achieve this?

• Used (along with fiscal policy) to prevent wide swings from high peaks to low troughs in business cycles

• Monetary policy - directed at influencing level of interest rates
by targeting a base cash rate

• MP to try to stimulate economy - reduce interest rates

• Reducing interest rates should lead to better economic growth

• MP to try to slow down economic growth - increase interest
rates

5

Relationship between Central Banks and
Governments

1. A Govt sets monetary policy & central bank implements it.
Case in NZ up to 1986.

2. A Govt sets monetary objectives within certain constraints -
central bank free to achieve objectives. Case in NZ now.

3. Monetary policy objective set in legislation - central bank free
to follow whatever course of action it sees fit to achieve
objective.
Case in Euro area & Switzerland.

6

what is NZ monetary policy objective?

objective under 1989 RB Act: to control inflation &
keep in band (stable prices)

7

who has to agree on a Policy target agreement?

Treasurer & Governor

8

what does OCR stand for?

Official Cash Rate

9

What rate does the RBNZ target?

The official cash rate (OCR)

10

Who controls the currency?

The RBNZ control the currency and sells (issues) cash to the banks that need it

11

what does RBNZ stand for?

Reserve bank of NZ

12

How many times a year is the OCR reviewed?

8 times a year & changes 25 bp or multiple.

13

what rate does the reserve bank (RB) borrow & lend at?

borrows and lends at OCR

14

WHAT RATE IS USED IF BANKS WANT CASH OVER NIGHT?

banks are charged interest rate 0. 50% above OCR

15

what is reverse repurchase agreement?

purchase of securities
with the agreement to sell them at a higher price at a
specific future date. (RBNZ)

• For the party selling the security (& agreeing to buy it
back in future-bank) it is a repo; for the party on the other
end of the transaction (buying the security & agreeing to
sell in the future) it is a reverse repurchase agreement
.

16

what are the Transmission Channels for monetary policy?

- Monetary policy channel
-Credit channel
-Wealth channel
-Foreign exchange channel

17

Monetary policy channel

- increase in OCR by RBNZ
(This is a tool of monetary policy)
Then  increase in other S/T rates as price of money bid up,
usually firstly S/T money market securities rates increase
e.g. bank-accepted bills- large company borrowing.
Then costs of funds for banks  so they increase deposit rates

18

Credit channel

- increase in OCR rise in investment risk 
bank lending may fall as borrowers come under stress due to
higher interest costs so less credit available

19

Wealth channel

- higher interest rates  decrease in asset
values  loss of confidence for companies & households 
decrease in economic activity

20

Foreign exchange channel

- rise in OCR  higher exchange rate
 exports may fall due to higher cost whereas import prices fall
 harmful effect on balance of trade & economic output

21

what are the immediate effect of Monetary policy channel?

• Short term interest rates e.g. overnight rates
• Wholesale S/T interest rates
• Foreign exchange rates

22

what are the intermediate economic indicators Transmission Channels for monetary policy?

• money/credit- e.g. deposit rates, floating mortgage rates
• asset prices- bond and equity
• economic activity
• domestic demand

23

what is fiscal policy and what are the instruments of it?

• Fiscal policy is concerned with govt.’s income & spending

• Tools (Instruments of fiscal policy) are:
– taxes,
– government spending or outlays &
– transfer payments

24

what is a budget deficit?

where government spending > income (from
taxes & other sources e.g. interest, fees & fines)

25

(1) what options can a govt use if its in a recession and wants to stimulate an economy but has a budget deficit?

one option is to borrow so its expenditure (G)
increases

• Borrowing from the domestic market

• Borrowing funds from overseas markets

the other option is govt. can reduce taxes to stimulate the economy

26

(1) • Borrowing from the domestic market

central bank issues $100m govt bonds to borrow.
- If govt spends all funds
 no change in money supply.
 Increase in real gross domestic product (GDP) in short-run
If one-off borrowing, first, upward pressure on ST interest rates

27

(1) • Borrowing funds from overseas markets

- initially, no impact on local borrowing, then either inflationary
or growth creating (
 in govt expenditure
 increase in real
gross domestic product (GDP) in S/T, & likely an increase in
taxes paid)
- Long term
 the govt. debt has to be repaid with interest

contractionary impact on economic growth in L/T.

28

(1) reduce taxes to stimulate the economy

expansionary fiscal policy-  consumers have more disposable income & in short-run, stimulatory fiscal policy will increase real GDP

29

Contractionary fiscal policy in regards to budget deficit

it could cut its
expenditure (spending) (G) overall

.- or raise taxes  people will consume less as their net
disposable income drops

- or reduce transfer payments- targeted groups spend less

30

whatis a budget surplus?

where income exceeds expenditure: