haffo3170 said:
Describe how the reserve bank of Australia uses domestic money market operations to tighten monetary policy and explain how the resent increase in the cash rate in November 2006 will affect consumer borrowing and saving.
this was a past question exam question that I have to answer, I'm struggling a bit and and would appreciate any discussion
thanks guys
When the Reserve Bank wishes to tighten monetary policy, it will sell government securities to financial institutions, in order to reduce the amount of liquid funds in the exchange settlement accounts of banks/financial institutions. Since there is a reduced supply of funds available for banks in their ES accounts, the demand for funds increases, thus leading to an increase in the cash rate for funds in the overnight/short term money market.
I think that's right.. not confident though.
For the second part; an increase in the cash rate is passed on to consumers in the form of higher interest rates on home loans and other loans from financial institutions. Higher interest rates discourage borrowing by consumers, as the higher rate of interest means that debt servicing (or interest) payments will be higher and occupy a greater proportion of household disposable income. Hence, the greater expenses faced by consumers from higher interest rates, also means that the marginal propensity to save is reduced, since a greater proportion of disposable income is directed towards servicing debt payments.
