Assignment On Impact Of Additional Monetary Stimulus

1Running head: MACROECONOMICS (PHPE 403)
Macroeconomics (PHPE 403)- Option 2: Policy Assessment 2
Ruchi Bhardwaj
Student ID: 300488552
Victoria University of Wellington

2MACROECONOMICS (PHPE 403)
Macroeconomics (PHPE 403)- Option 2: Policy Assessment 2
1. Impact of Additional Monetary Stimulus on the Mentioned Situation
The Reserve bank Of New Zealand (RBNZ) has reduced the official cash rate to 1.5
per cent, which might prove to be immensely beneficial for the employment. There is
uncertainty with respect to the global economic scenario. According to the RBNZ, domestic
growth has slowed down to a certain extent (Rbnz, 2019). Moreover, markets have taken
action for cutting the needs of the banks. With respect to the study, the monetary policy helps
in lowering the interest rates and motivating the expansionary monetary policies. In addition,
monetary policy has dealt with the interest rates, which also entails the contractionary as well
as expansionary ones. These two types of policies have emphasized macroeconomic goals
such as inflation and unemployment. Furthermore, the monetary policy generally deals with
the interest rates and the accessible amount of the loanable funds, which affects the
components of the aggregate demand (Lumenlearning, n.d.).
On the other hand, contractionary monetary policy deals with greater interest rates
and reduced quantity of the funds. On a similar note, expansionary monetary policy mainly
deals with the lower interest rate and higher loanable funds, which emphasizes business
investment and borrowing for the other items. In addition, when the economy deals with the
recession and higher rates of unemployment, the output is found to be listed below the
potential GDP (European Central Bank, 2019). Moreover, the expansionary monetary policy
enhances the economy largely.

3MACROECONOMICS (PHPE 403)
Figure 1: Changes in the demand
This figure generally defines the situation in the aggregate demand. This mainly
shows the short-run going upwards, which is considered as the Keynesian aggregate supply
curve (SRAS). In the figure, it has been observed that the equilibrium occurred at point E0
and provides out of 600 during the recession (Opentextbc, n.d.). On the other hand,
expansionary monetary policy mainly focuses on reducing the interest rates, accelerates the
investment and the consumption spending. Thus, it can be stated that the aggregate demand
curve (AD0) will shift towards the right to AD1. It can further help in understanding the new
equilibrium, which occurs in relation to the potential GDP level (Opentextbc, n.d.).
Figure 2: Changes in the Interest Rate