The Impact of Changes in Interest Rates (HSC SSCE Economics): Flashcards
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Transmission mechanism
Transmission mechanism
Process where monetary policy changes flow through economy
4 monetary policy transmission channels
4 monetary policy transmission channels
Interest rate, cash flow, exchange rate, wealth
Expansionary monetary policy effect
Expansionary monetary policy effect
Puts downward pressure on interest rates
Interest rate channel function
Interest rate channel function
Lower rates make borrowing cheaper, boosting spending
Cash flow channel function
Cash flow channel function
Lower loan repayments free up disposable income for spending
Exchange rate channel function
Exchange rate channel function
Lower rates depreciate currency, boosting export competitiveness
Wealth channel function
Wealth channel function
Lower rates raise asset prices, increasing wealth & spending
Wealth effect
Wealth effect
Rising asset values make people feel wealthier, boosting spending
Monetary policy time lag
Monetary policy time lag
12 to 24 months for full impact
Tightening monetary policy effect
Tightening monetary policy effect
Dampens spending, lowers demand, inflation & growth