In which of the following situations would the Reserve Bank of Australia conduct contractionary monetary policy?...

In which of the following situations would the Reserve Bank of Australia conduct contractionary monetary policy?

A.The RBA fears that unemployment is climbing above the natural rate of unemployment.

B.The RBA is worried that deflation will become a problem.

C.The RBA is concerned that the natural unemployment rate is trending downward.

D.The RBA is concerned that the growth in aggregate demand would continue to exceed the growth in potential GDP.

E.The RBA believes that aggregate demand is growing too slowly to keep up with potential GDP.

Expert Solution

The purpose of the Contractionary Monetary Policy is to control the rising trend in prices.

There exists a negative relationship between unemployment and inflation. A high unemployment well above the natural rate will indicate a low inflation in the economy. Since inflation is not high, RBA does not have to control it.

So, option A. is incorrect

In the case of deflation (fall in the general price level) Expansionary Monetary Policy is used. So, option B. is incorrect

The monetary policy goal is not to anchor the unemployment rate around its natural level. So, option C. is incorrrect

If RBA anticipates than the Growth of AD > Growth in Potential GDP, then prices will rise in the economy and inflation will occur. In order to curb the situation, RBA will adopt a contractionary monetary policy to reduce the money supply flow and the price level. So, option D. is correct

If aggregate demand is growing too slowly to keep up with potential GDP then the inflation is under control and there's no need to adopt such policy. So, option E. is incorrect

Hence, Correct option is option D.

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Rahul Sunny answered 2 years ago

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