Question

a) Market participants, including financial institutions, fund managers and corporations, must understand monetary policy setting impacts on economic activity and business cycle. A central bank will typically implement monetary policy settings in order to achieve certain economic outcomes over a business cycle. Choose two countries from the list below, describe the intermediate target for monetary policy, and explain the implementation process of the monetary policy in the two countries you selected. Give examples of different economic indicators that may give an insight into the future stages of a business cycle. - the United States - Australia - Singapore - China - Russia - New Zealand

Answer 1

United States:

• Intermediate Target: In the United States, the Federal Reserve (the central bank) uses the federal funds rate as an intermediate target for monetary policy. The federal funds rate is the interest rate at which depository institutions lend balances to each other overnight.

• Implementation Process: The Federal Reserve influences the federal funds rate through open market operations, which involve buying or selling government securities (bonds) in the open market. When the Federal Reserve buys government bonds, it increases the reserves of the banking system, leading to a decrease in the federal funds rate. Conversely, selling government bonds reduces reserves and increases the federal funds rate.

• Economic Indicators: Economic indicators that can provide insights into the future stages of the business cycle in the United States include:

• Gross Domestic Product (GDP): GDP growth rate indicates the overall health of the economy. Higher GDP growth may signal expansion, while lower growth may indicate a slowdown.

• Unemployment Rate: A low unemployment rate indicates a strong labor market and potential economic expansion, while a high unemployment rate suggests economic weakness.

• Consumer Price Index (CPI) or Personal Consumption Expenditures (PCE) Index: These measures of inflation can help gauge the level of price stability in the economy. Rising inflation may indicate an overheating economy, while low inflation may indicate weaker demand.

Australia:

Intermediate Target: In Australia, the Reserve Bank of Australia (RBA) uses the cash rate as its intermediate target for monetary policy. The cash rate is the interest rate on overnight loans between financial institutions.

• Implementation Process: The RBA implements monetary policy through open market operations, similar to the Federal Reserve. By buying or selling government securities, the RBA influences the supply of funds in the banking system and, consequently, the cash rate. Lowering the cash rate stimulates borrowing and spending, while raising it encourages saving and reduces inflationary pressures.

• Economic Indicators: Key economic indicators that can provide insights into the future stages of the business cycle in Australia include:

• GDP Growth: Similar to the United States, GDP growth rate reflects the overall economic performance and can indicate expansions or contractions in the business cycle.

• Employment Data: Measures such as the unemployment rate, employment growth, and labor force participation rate provide insights into the strength of the labor market and overall economic conditions.

• Consumer Confidence Index: This index measures consumer sentiment and their expectations about future economic conditions. Higher consumer confidence often indicates a stronger economy and potential expansion.

It's important to note that the specific implementation processes and intermediate targets for monetary policy can vary over time, and central banks may employ additional tools to influence the economy. The examples provided offer a general understanding of how monetary policy operates in the selected countries.