IntroductionThe report brings an analysis of an article that concern with cut rates by RBA. Policy instruments are defined as the available options that can be utilized by the government to run economic activities. Instruments are classified as either monetary policy or fiscal policy. Fiscal policy refers to those actions undertaken by the government in relation to its level and composition of expenditure, borrowing and taxation with the main objectives being to spur economic growth, lower unemployment rate, manipulate growth and level of output and aggregate demand. Monetary policy refers to the actions pursued by the central bank of a country to regulate the amount of money supply in the economy.
The actions can be either on interest rates or on exchange rates. The main objective is to check on the rate and level of expansion of AD (aggregate demand) in the nation. Specifically it is used to control the rate of inflation and unemployment rate. Monetary policy can classified as expansionary or contractionary policy. Therefore, a target is also referred to as an objective. It is the aim of any economic policy and it can be measured in reference to an economic variable like unemployment rate, growth of Gross Domestic Product (GDP), or rate of inflation.
To achieve these targets we use policy instruments. A change in economic policy (instruments) used will led to a change on the other variable (the target). This indicates of the relationship existing among economic variables. The expansionary monetary policy has a positive effect on the challenges that an economy is going through in a sub-prime crisis. The challenges include low growth rate and skyrocketing interest rates.
The policy will reduce the interest rate which is a recipe for increased capital investment, hence an improvement in economic growth. The use of discretionary monetary policy is suitable for the reserve bank of Australia in control of the prevailing economic crisis. The result of a sub-prime crisis is ballooning inflation rates; the households find it difficult to meet their daily needs. To reduce the high inflation rates, which are closely related with the deficiencies within the financial sector, is to adopt monetary policies that are geared towards reducing the interest rates and stability of commodity prices. Factors considered in determining interbank interest ratesThe main objective of Australian government is to boost economic growth.
Therefore, the country policy makers will have to adopt a growth targeting monetary policy. Under this monetary policy, the target is to improve economic performance. The growth target can only be attained through the central bank periodical adjustment on the interest rate target. The economy will adopt an expansionary monetary policy where the amount of money supplied in the economy is increased through interest rates cut leading to growth and increased investment.
The changes made on the interest rate target occur in response to a number of market indicators in an effort to foretell economic patterns. This will ensure that the key objective of an economic growth target is achieved. When cash rate is lower than the expected, the commercial banks are likely to increase interest rates. This is an expansionary policy since it will ensure a just economy and a low interest rate.