Question

Discuss the tools at the Reserve Bank of Australia's disposal relative to managing inflation. If the Fed Chief wanted to reduce inflation what specific actions do you think the fed chief would do and why?

Answer 1

The tools to manage inflation:

1. By regulating interest rate: By increasing or decreasing interest rates the money supply to the economy and increases or decreases. Higher the interest rate lower is the inflation and lower the interest rate higher the inflation. This can be used as tool to manage inflation at arrange of 2-3 % in the medium term as targeted by Reserve Bank of Australia.

2. By Open Market Operation: By open market operations Fed Chief can manage inflation by buying or selling government treasury bonds from the banks. This can restrict or inject liquidity into the banking system which in turn increases or decreases liquidity among the public

3. By regulating Reserve requirement ratio: By increasing or decreasing reserve ratio more cash will be parked with the Reserve Bank of Australia. This will reduce or increase capital in banks.

Fed Chief of Australia can increase interest rates, sell government and treasury bills in the open market operation or increase the reserve ratios. The above methods can curb inflation.

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