Contractionary Monetary Policies in Australia Used to Control Inflation - Essay Example

Contractionary monetary policies in Australia used to control inflation The Australian economy has experienced bursts of inflation and especially during between 2005 and mid-2008 (Morris 2012 p.117). The country was faced with the demand inflation that was influenced by the levels of aggregate demand in the economy. The demand inflation occurs due to the presence of enormous spending that exceed the country’s productiveness. The federal government through the Reserve Bank employed various contractionary economic policies seeking to fulfil its primary goal that involves maintaining an acceptable level of inflation in Australia.

One of the policies involved included the change in the interest rates offered in the country. The Reserve Bank of Australia implemented higher interest rates with an attempt of affecting and influencing consumer spending. The government established the higher interest rates with its primary intention seeking to increase the interest rate at which banks issued loans and on which they pay on savings. Higher interest rates allow more clients to save their money discouraging their spending levels.

Consequently, the higher rates discourage consumers from acquiring loans from financial institutions (Morris 2012 p. 121). The aggregate demand is decreased since consumers save larger portions of their incomes. The increased savings due to the favorable interest rates offered on savings by banks reduced the supply of money in the Australian economy. Other measures involve increasing the reserve requirements for the financial institutions so as to discourage their lending levels. The Reserve Bank of Australia also borrowed from the local institutions all with the intention of decreasing the stream of money in the economy.

The Reserve Bank of Australia sells the Commonwealth Government Securities in the money markets to the citizens and the various institutions. Reference listMorris, R. (2012). Chapter 3: Australia’s inflation as a contemporary economic issue. In: Economics down under. VCE economics units 1 & 2. Milton, Qld.: John Wiley & Sons. 111-132.