The OCR appears in almost every recent paper, but usually as one part of a longer question rather than its own section — worth isolating the full chain on its own, since a broken link anywhere in it caps the answer.
The full transmission chain, in order
RBNZ changes the OCR → this feeds through to the interest rates banks charge on loans and pay on deposits.
A HIGHER OCR raises borrowing costs → households and businesses cut back on loan-funded spending (mortgages, business investment) → C and I fall → AD falls.
A higher OCR also attracts foreign investors seeking a better return → demand for NZD rises → the exchange rate appreciates → exports become less competitive, imports cheaper → net exports (X − M) fall, reinforcing the fall in AD.
Both channels (domestic spending AND the exchange rate) push AD in the SAME direction — naming both, not just one, is what separates a Merit answer from an Achieved one.
Expansionary vs contractionary monetary policy
OCR change
Interest rates
AD
Used when
Expansionary
OCR ↓
Fall
AD rises
A recessionary gap — Y below Yf, unemployment above natural rate
Contractionary
OCR ↑
Rise
AD falls
An inflationary gap or rising inflation above the PTA target
Real paper — 2025 Expansionary monetary policy in a large recessionary gap Explain how expansionary monetary policy will affect households, businesses, and inflation when the economy has a LARGE recessionary gap. OCR falls → banks lower interest rates on loans and mortgages. Households: lower mortgage repayments free up disposable income, and cheaper borrowing encourages spending on big-ticket items → C rises. Businesses: cheaper finance encourages investment in new capacity → I rises. With a LARGE recessionary gap, there is significant spare capacity, so the extra spending mostly raises OUTPUT rather than prices — inflationary pressure stays modest even as AD rises. ✓ C and I rise, AD shifts right, and because the gap is large, the effect falls mostly on output rather than price — this is exactly why the SIZE of the recessionary gap changes how "effective" the same policy is judged to be. ✕
Naming only one transmission channel
A recession-focused answer that describes only the domestic interest-rate effect (or only the exchange-rate effect) is incomplete — real schedules for this standard reward BOTH channels traced through to AD, since a change in the OCR always moves interest rates AND the exchange rate at the same time.