Monetary policy   Goals of monetary policy   RBA Charter   Role of underlying inflation   Implementing monetary policy   Tightening of MP   Loosening of MP   How other rates change   Pre-emptive decisions   'Open mouth operations' Exchange rate intervention  Monetary policy stance   Expansionary policy  Monetary policy neutrality    Restrictive MP   Transmission mechanisms   MP and economic goals   low inflation Growth/jobs  MP strengths and weaknesses

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Monetary policy tightening

A tightening of monetary policy involves the RBA announcing a higher target cash rate the afternoon of its monthly Board meetings.  If it decides to increase the target cash rate from 4.5% to 4.75% (as it did in November 2010) it will intervene in the market via OMOs to ensure that at the start of each day, the actual cash rate is as close as possible to the new higher target cash rate.  Theoretically, this will involve the RBA acting swiftly to reduce liquidity (via the selling of CGS or repos) in order to increase the cash rate.  However, in reality, the market will automatically adjust without this RBA intervention because the mere expectation that the RBA will act to move the cash rate to its new target is enough for this to happen immediately.  Accordingly, following a tightening of monetary policy, the RBA will simply need to focus once more on narrowing or eliminating the gap between the actual cash and the new target cash rate.  A tightening of monetary policy can be depicted by the use of a D/S diagram below:

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