unit 4 subtopic B

Question 1

what is the target inflation rate for the RBA

Answer 1

2-3%

Question 2

what is the target GDP growth rate

Answer 2

3-4%

Question 3

what is the role of the RBA

Answer 3

implements monetary policy, fosters financial stability

Question 4

what are the objectives of monetary policy

Answer 4

stability of Australia’s currency
full employment
prosperity and welfare of people in Australia

Question 5

what are the benefits of meeting the inflation for different stakeholders (production sector, household sector, external balance)

Answer 5

production sector- price certainty (planning), promotes investment, reduces inflationary and deflationary gaps
household sector- higher purchasing power due to price stability, increased employment due to business certainty, protects savings of retirees
external balance- competitiveness in domestic products, stable exchange rate, foreign investments due to predictable inflation rates

Question 6

what are the 4 channels of monetary policy transmission

Answer 6

saving and investment, cash flow, asset prices and wealth, exchange rate

Question 7

what are the impacts of increasing/decreasing interest rates on the four channels and overall economy

Answer 7

increasing interest rates (contractionary)
saving and investment- increase saving, decrease borrowing, decrease spending
cash flow- decrease disposable income for borrowers, increase disposable income for savers
asset prices and wealth- decrease asset prices, decrease wealth
exchange rate- AUD appreciates (more investment), exports fall, imports rise

decreasing interest rates (expansionary)
saving and investment0 decrease saving, increase borrowing, increase spending
cash flow- increase disposable income for borrowers, decrease disposable income for savers
asset prices and wealth- asset prices increase, wealth increases
exchange rate- AUD depreciates (less investment), exports rise, imports fall

Question 8

explain the effect of the government selling bonds to banks on cash rate and AD

Answer 8

when banks buy bonds they have less cash and thus, the cash rate will rise due to lower supply. this will cause AD to fall

Question 9

is an easing monetary policy stance expansionary or contractionary

Answer 9

expansionary