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How Does The Rbra Affect The Economy

954 Words4 Pages

The Reserve Bank of Australia (RBA) often implements monetary policy to change the economies cash rate with the desired result of closing gaps in the economy. These gaps can be expansionary gaps or recessionary gaps as both may be harmful to the economy. The RBA can only influence the amount of money in the economy. They do this by buying or selling government securities. If the amount of money in the economy changes the result is the cash rate of that economy changing. In figure 1 we can see that injecting money into the economy causes the supply curve to shift to the right, from S¬0 to S1 because there is a greater supply of money. This causes the equilibrium cash rate to fall to a lower level from r0 to r1. We see similar results when the RBA takes money out of the economy, the cash rate will rise to a higher equilibrium. By changing the cash rate, the RBA can affect many other factors in the economy such as interest rates, inflation rates and Planned Aggregate Expenditure (PAE). …show more content…

The Cash rate is basically the interest rate that banks must deal with when borrowing money from the RBA (REFERENCE). This acts as a base for which the banks set the economies interest rates(REFERENCE). The banks don’t have to set their interest rates to be the same as the cash rate but if they don’t, often another bank will set their interest rate to be closer to the cash rate and so customers are more likely to go the that bank to borrow money. This means the cash rate will affect the economy wide interest rates by acting as a base in which other banks set their interest

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