Monetary Policy And How Does The Reserve Bank Use It Control Inflation?

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The Government wants to have low inflation rates in New Zealand because prices increase and the value of the NZD depreciates causing many problems in the economy. The government controls this with the idea of price stability. Price stability is when prices are stable in the economy. This means that the value of the dollar is holding. It is expected that some goods and services will still rise and fall. What is monetary policy and how does the reserve bank use it to control inflation? The Reserve Bank uses monetary policy to control inflation and keep it between 1-3%. The do this by controlling the OCR (official cash rate). If there is a shortage of money in the economy the dollar will be worth more meaning the buying power of say a $5 bill increases. But if there is a large amount of money flowing in the economy the dollar is worth less. The reserve bank uses monetary policy to get the right mix of money in the economy to insure stability in prices. Price stability is desirable in for many reasons. One of these is that it prevents Arbitrary Redistributions of wealth as there is unexpected rapid inflation or deflation. Price stability also increases certainty about the future for businesses and profitability. This because if there is a stable level of prices in the economy meaning their goods/services remain at the relatively the same price. Also they know how much profits they will be making but if there was inflation they would be uncertain about the future, their business, employees and profit margins. As there is price stability businesses will invest more in capital goods as interest rates will be lower. Another reason for this is business confidence. They feel confident that they will be pro... ... middle of paper ... ... also creating a rise in unemployment. This reason shows that the free trade policy is a good way to conteract the affects of the tight monetary policy effectively. Firms eports increase which increases profit and revenue. Firms may then deciede to expand and invest creating more jobs and oppurtunities. This will increase how much they can supply at a certain cost. New Zealand will enter into a Multilateral trade agreement. This is when there is more than two countries invlolved. The tppa will really benefit our economy because it is so small compared to the countries we are entering into agreements with. If we had a free trade agreement with the US one of the largest if not the largest economy in the world our economy would begin to grow very fast. This would be great as our economy can expand and invest. The model below shows productivity increasing.

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