Monetary policy (p204)

Question 1

The Monitory Policy is a set of rules set by the Reserve Bank to run the economy. What is the most important function of the Reserve Bank?

Answer 1

Ensure the INFLATION is kept within an acceptable limit

Question 2

How does the Reserve Bank ensure that the INFLATION is kept within acceptable limits?

Answer 2

1) Interest rate
2) Money supply
3) Inflation targeting
4) Exchange control

Question 3

Explain how the INTEREST RATE is used to keep INFLATION within acceptable limits

Answer 3

• interest is charged by the Reserve Bank to
  the banks and is called the repo rate
• The Reserve Bank INCREASES the repo
  rate to reduce inflation.
• Banks are forced to INCREASE the prime
  rate
• Clients reduce borrowing as it is expensive

Question 4

Explain how the MONEY SUPPLY is used to keep INFLATION within acceptable limits

Answer 4

Reserve Bank must ensure that the amount of money does not exceed the quantity of goods available.

Question 5

Explain how INFLATION TARGETING is used to keep INFLATION within acceptable limits

Answer 5

Keep inflation within specific TARGETS (normally between 3% to 6%)