Vocabulary practice

Monetary policy is typically implemented by a central bank, while fiscal policy decisions are set by the national government. However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run.

In general, a stimulative monetary policy is expected to improve the economy's rate of growth of output (measured by Gross Domestic Product or GDP) in the quarters ahead; tight or restrictive monetary policy is designed to slow the economy in the future to offset inflationary pressures.

Likewise, stimulative fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run, while tax increases and spending cuts tend to slow the rate of future economic expansion.

The extent and choice of any additional interest rate hike which could be necessary will depend on whether future economic data show more signs of increasing inflation risk.

Having raised the overnight lending rate from 1% to 5.25% the Fed decided to take a pause, while the world’s other largest central banks (ECB, the Bank of Japan and the Bank of England) quite recently embarked upon a rate increase campaign.

Texts to translate:

36. Tightening Has Begun To Take Hold

After experiencing a lift to their economy from the Summer Olympics, Australians should prepare for less than a gold-medal performance in coming months.

The economy is slowing around the edges, although not to any worrisome degree. Consumers are cooling off, and housing remains weak compared with a year ago. The economy's biggest engine is exports, and that should continue into the next year. But after real gross do­mestic product soared at a 4.7% average annual rate for the past three years, growth is likely to slow to 4% for the year ending June.

That at least was the word from Reserve Bank of Aus­tralia Governor Ian Macfarlane when he testified before Parliament on Nov. 30. He said domestic demand would have a "substantial slow­down," growing by about 3% instead of the current 6% pace. Capital spending alone is expected to grow about 4%, after some weakness in mid-2000. But a weak Aussie dollar would bolster exports.

A softer economy worries Australia's executives. Business confidence plunged in the fourth quarter. And the profit outlook is the lowest in 10 years.

With signs of a slowdown increasing, RBA policy-makers kept rates unchanged at its Dec. 5 meeting. The RBA had raised its overnight cash rate by a total of 1.5 percentage points, but now policy bias is in neutral .

The RBA's tightening moves were aimed at keeping inflation in check. Although a 25% jump in oil prices has boosted total consumer prices, inflation was rising even before fuel costs spiked. In the third quarter, consumer prices were up 6.1% from a year ago, but the rate was skewed by the introduction of a 10% sales tax.

Macfarlane said the RBA expects inflation to settle down to 3%. That rate would be at the up­per limit of the RBA's inflation target. The high inflation rate is partly the result of the weak Aussie dollar, which will lift import prices. Indeed, the RBA could face a tough challenge next year. It may have to strike a balance between the weak Aussie's benefits to ex­porters and its cost in the form of higher inflation.