The OCR is a monetary policy undertaken by the Reserve Bank of New Zealand. This assignment will help determine the reason and the effect the lowering of the OCR would have on promoting growth using the IS-LM model. This model will work with the policy. The proposed policy will mean the New Zealand economy will be able to move from a negative to positive state. This scenario can be used by other countries if a natural disaster strike and has the same impact like on the NZ economy. The short term impacts were minimal as only GDP were impacted which was different to the forecasts predicted. Many industries moved and relocated to different parts of NZ at a cost.
To understand the reason for the chosen policy to lower the OCR, IS-LM theory must be explained. A literature review of the theory which will be used for further analysis and evaluation of the chosen policy to see the effectiveness on the recovery st...
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... determined by what level of money people hold. The interest rate is considered the opportunity cost of holding money.
Interest rates rise, consumers hold less in terms of money and vice versa.
The other factor which determines the level of demand for money is output. If output and expenditure is high , people are likely to engage in transactions involving money. this leads to a higher level of demand for money. the quantity of money is negatively correlated wtih interest rates and and positively with output. An increase in income will shift the demand to the right. this is assuming that the supply is unchanged , but interest rates must rise in order reach equillibrium. the LM curve conveys the relationship between interest rates and level of output .The higher level of output ,higher demand for money and higher interest rate determines the upward sloping LM curve.
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