Eco Question (1 Viewer)

[181jsmith]

what are the impacts of loose monetary policy on the value of the exchange rate and economic growth in Australia? thanks

 

[RishBonjour]

Loose monetary policy has alot of effects, but not sure about exchange rates

but basically, loose monetary policy, causes the interest rates to drop ----> greater investment spending, and consumptions ----> economic activity increases ---> growth

feel free to correct me If I'm wrong im not 100% sure

 

[Aluminesis]

From memory...

Loose monetary policy is when RBA buys government securities, increasing the money supply in exchange settlement accounts and putting downward pressure on the cash rate. This results in a fall in interest rates.

If interest rates drop, it is cheaper for consumers and businesses to borrow, leading to higher levels of consumption and investment. This promotes economic growth.

A decrease in interest rates makes return on investment in Australian assets less attractive to overseas investors (e.g. investing in Aus will give you say 10% return while say America gives you 15%), leading to a fall in financial inflow. This results in an increase in supply of $A, causing a depreciation. In other words, if Australia's interest rates are higher relative to overseas interest rates, it will lead to more financial inflow, greater demand for $A and therefore an appreciation. If Australian interest rates are lower relative to overseas interest rates, foreign assets become more attractive, leading to financial outflow. This increases supply of $A, leading to a depreciation.

Hope that helps but also echoing RishBonjour: feel free to correct me if I'm wrong!

 

[hungwell1337]

due to the convergence of interest rate parity in the international market; loosening of monetary policy in theory should leads to a depreciation of the domestic currency as investors may receive better returns elsewhere

 

[RishBonjour]

A decrease in interest rates makes return on investment in Australian assets less attractive to overseas investors (e.g. investing in Aus will give you say 10% return while say America gives you 15%), leading to a fall in financial inflow. This results in an increase in supply of $A, causing a depreciation. In other words, if Australia's interest rates are higher relative to overseas interest rates, it will lead to more financial inflow, greater demand for $A and therefore an appreciation. If Australian interest rates are lower relative to overseas interest rates, foreign assets become more attractive, leading to financial outflow. This increases supply of $A, leading to a depreciation.

Hope that helps but also echoing RishBonjour: feel free to correct me if I'm wrong!

That part!

 

[PhysicsGirl]

These are directly from my notes:

Loose monetary policy involves the RBA buying government securities, which increases the money supply in the cash market, therefore resulting in a fall of the cash rate (or interest rate.)

When interest rates drop, it is cheaper for domestic consumers and businesses to borrow, because the cost of borrowing is now lower. Therefore, this stimulates consumer/business borrowing and investment, and increases demand and ecenomic growth.

Also, when interest rates drop, this discourages foreign investment/financial inflow because investing in Australia will give you a lower return than normal, increasing the money supply, reducing the demand for $A and leading to a depreciation of the curreny, encouraging foreign investors to invest elsewhere where interest rates are higher. A depreciation of the currency also makes exports cheaper relative to imports, therefore making our exports more internationally competitive and more affordable to foreign buyers, whilst buying for imports is less affordable domestically. Because our exports are cheaper and more affordable, there will be a rise in aggregate demand and a rise in Net Exports, stimulating ecenomic growth.

As a result of low interest rates, the cost of servicing debts falls, which encourages consumers to direct the cash into additional spending, increasing growth and demand.


That's about all you would really need to say.

 

[king chopper]

Loose monetary policy means foreign investors are less likely to invest in Aus due to less rewards. Therefore, less demand for $A or people sell $A thus depreciating the $A

 

[thorax94]

Loose monetary policy -> decrease in cash rate (cash rate is the return that an investor receives when they invest in the AUS market) -> decrease return to investors -> decrease demand for AUS currency -> the exchange rate falls

 

[Tennisaddict]

Basically been said but loose MP = lower IR.This creates decreased demand for AUD (less profitable for business investment inflows from OS) and increased supply for AUD (compartively better opportunities for domestic investor outflows OS) Both these effects lead to a depreciation.

 

[determine]

Yes, all of the above information is valid. Well done guys!

 

[PhysicsGirl]

Yep. If this comes up in an exam, just remember the key points - how a fall in interest rates relative to international ecenomies discourages financial inflow, increasing the supply of $A, depreciates the currency, stimulates domestic consumption and investment, it's impact on exports and imports etc. If it were a "Tightening" of Monetary policy, it would be the exact opposite.

 

[181jsmith]

thanks for all the great answers, really appreciate it