Question 1 As opposed to China, where monetary policy is mostly conducted by tar

Question

Question 1 As opposed to China, where monetary policy is mostly conducted by targeting reserve ratios, the conduct of monetary policy in Western countries such as the United States or Australia proceeds by open market operations (OMO). Answer the following: a. explain how the central banks of Western countries conduct monetary policy by announcing and meeting a cash rate target. Is this an example of demand-side policy or supply-side policy? (12 marks) is the RBA's conduct of monetary policy more likely to be effective in the short-term or in the long-term? Explain. (8 marks) b.

Explanation / Answer

Answer a : As we know that monetary policy is the process of maintian proper money supply in an economy. It often target interest rate to ensure price stability and general trust in an economy. Cash rate target is used by the central bank such as if the central bank has lower cash rate target than there is expansionary monetary policy which lead to commerical bank to take more credit from the another bank which have excess balance and has more liquidity. If it is lower than there is more liquidity in the bank to provide cheaper credit interest rate boost consumer spending which resulted in business loan become more affordable where as the centeral bank has higher cash rate target than there is contraction monetary policy which lead to commerical bank supply of money in the market. Economic growth has been slow down.

Working and meeting of Cash rate target :

This is an example of Demand side as cash rate target decreases the demand of commerical bank to taken overnight loans has been increased and it also increases liquidity increases in an economy.

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Answer b : As we know Cash rate is the rate which banks pay to borrow fund from other bank in the money market on overnight basis. RBA is used as the cash rate as the operational target for the implementation of monetary policy. The RBA calculate and published this rate everyday on the basis of data collected directly from bank. As we know the australia is a country in which there is floating exchange rate, monetary policy involves management of short term interest rate to achive domeatic policy objectives.

There are long term objectives as follows :

Monetary policy is more effective in long run scanerio time period.

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