Question

Compare the action RBA is likely to take when Australia’s Consumer Price Index (CPI) is decreasing from 4% to 3% and when the CPI is rising from 3% to 3.5%.

you are expected to include (but is not limited to) the use of the words: money, rate, supply, interest, inflation, increase/decrease, spending.

Answer 1

CPI is the measure of inflation in the economy.

Rising CPI value implies higher prices of goods and services and higher inflation

Falling CPI value implies lower prices of goods and services and lower inflation

In either of the cases, the RBA will adopt the Monetary Policy to anchor the inflation rate.

If CPI decreases from 4 to 3%, then the RBA will adopt Contractionary Monetary Policy. The policy would decrease the flow of money supply and reduces the purchasing power of the people. This will stop the aggregate demand to increase more and create a balance between aggregate demand and supply.

If CPI increases from 3 to 3.5%, then the RBA will adopt Expansionary Monetary Policy. The policy would increase the flow of money supply and increases the purchasing power of the people. People will start demanding more goods and services and the aggregate demand will increase which was at lower level due to rise in CPI Value.