24372284
Description
Flashcards by Sophia Lynch, updated more than 1 year ago
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Created by Sophia Lynch
almost 4 years ago
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| Question | Answer |
| What will changes in the ORR or changes in deposits trigger? | A change in the money supply. |
| What are the accounts private banks hold at the Reserve bank called? | Settlement accounts. |
| If a private bank doesn't have enough money in it's settlement account, it can borrow from the RBNZ at the OCR plus...? | 5% (or 50 points above the OCR) |
| Why does the OCR determine the call rate in which banks charge their customers? | Because charging a rate lower than the OCR would be pointless as banks would make no profit. |
| Banks HOLDING settlement cash... | Get paid the OCR (in some cases -1% if over a certain limit) |
| Banks BORROWING settlement cash ... | Pay the OCR + 5% |
| What happens when the RBNZ lowers the OCR? | |
| What is the '90-day bill rate'? | The prediction of the OCR made for its change every 6 weeks. |
| What is the effect of increasing the money supply, vice versa | This encourages spending and puts upward pressure on prices. |
| What is the stable 'inflation band'? | Between 1 - 3 % This may be ignored when economic activity is low. |
| What is 'settlement cash'? | The deposits that banks keep with the RBNZ to settle their end of day net transactions with other banks. RBNZ pays interest on this cash. If banks don't have enough then banks have to borrow it off the RBNZ with interest. |
| What is the difference between the interest on overnight loans vs settlement cash. | Overnight loans = 50 points above the OCR |
| What happens when interest rates rise? | 1. The ORR falls as banks want to run down reserves and supply more loans 2. This fall results in the rise in the money supply through the fractional reserve banking system 3. Hence a positive relationship between interest rates and the money supply in the economy |
| When the ORR falls, why would banks want to keep less in reserves at the RBNZ? | Because settlement cash deposits earn a lower return. |
| When the OCR rises, what do banks want to do? | Keep more in reserves at RBNZ since settlement cash deposits earn a higher return. |
| What are 3 things that effect the economy as a whole when interest rates are increased by the RBNZ? | 1. Customers reduce their demand for credit 2. This results in a decrease in the demand for goods and services 3. Shifts AD to the right and reduces inflation pressure |
| What is the Taylor Rule? | The RBNZ raises interest rates whenever expected inflation is higher than the target rate, or when there is an output gap. When there is inflation, the RBNZ raise nominal interest rates by the inflation rate and then by the extra Taylor rule amount. |
| Whats the difference between 'dovish' and 'hawkish'? | Dovish = favours loose monetary policy, so nominal interest rates tend to be low Hawkish = favours tight monetary policy, so nominal interest rates tend to be high |
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