Australian Monetary Policy
Table of Contents
1 Introduction: Australian Economy 2
1.1 Real Gross Domestic Product 2
1.2 Inflation 2
1.3 Employment 3
1.4 Current Account 3
1.5 Exchange Rate 3
2 Monetary Policy 5
2.1 Objectives of Monetary Policies 6
2.2 Demand for Money 8
2.3 Supply of Money 10
2.4 Money Equilibrium 11
2.5 Effects of Money Supply (Demand) 11
2.6 Keynesians Vs Monetarists 12
3 Monetary Policy Framework 16
4 Monetary Policy Implementation 18
5 Open Market Operations 21
6 Fractional Reserves 23
References 25
1 Introduction: Australian Economy
The Australian economy strengthened as 2001 progressed, in sharp contrast to the weakening seen in most of the rest of the world. Gross Domestic Product (GDP) grew by 4.2 percent through the year to the December quarter 2001. Unemployment remained low and signs of improvement were visible in the December quarter 2001, while ongoing inflation remained within the Reserve Bank of Australia’s target range over 2001. (Asia-Pacific Economic Cooperation, 2002)
1.1 Real Gross Domestic Product
Real GDP increased 2.6 percent in 2001 (in year average terms) following growth of 3.1 percent in 2000. The slowing in the rate of growth in the first half of 2001 reflected the abatement of transitory factors such as the Sydney Olympics stimulus and the introduction of The New Tax System (TNTS). In the second half of 2001 Australia’s growth rebounded strongly, despite weakness in the world economy. Nonetheless, over 2001 Australia was one of the strongest developed economies. (Asia-Pacific Economic Cooperation, 2002)
1.2 Inflation
The Australian Consumer Price Index (CPI) increased by 3.1 percent through the year to the December quarter 2001. Various one-off factors added to inflation over that period. The price of meat, seafood, fruit and vegetables increased substantially through the year. In addition, some price effects have resulted from the events of September 11, the collapse of a major Australian insurance firm (HIH) and the second largest Australian airline (Ansett). These upwards price movements were offset somewhat by a significant decline in petrol prices over the year due to a fall in global oil prices. (Asia-Pacific Economic Cooperation, 2002)
1.3 Employment
Employment grew by 1.0 percent in 2001, while the unemployment rate increased steadily over most of the year to peak at [next page]