Question

Monetary policy is one of the key responsibilities of the Reserve Bank of Australia

i) What is Monetary policy? (1 mark)

ii) If inflation next quarter is predicated to fall to 1% p.a. due to the impact of Covid-19, how would the RBA adjust the official cash rate in response to this situation? Briefly explain the reason for this adjustment (Include in your answer the inflation target of monetary policy, the expected effect of any suggested change in cash rate on consumption, investment and the likely change to net export).

Answer 1

1. Monetary policy is the policy which is determined by the central banks of the nation in order to control the money flow in the economy and it will be having various kinds of tools in order to control the money flow like interest rates and required reserve ratio.

2. Reserve Bank of Australia would be lowering down the cash rate in the response to the coronavirus crisis as when it will be lowering down the cash rate, it would be leading to a lower cost for various intermediaries and it would be getting into a quantitative easing policy for the entire economy and it would be leading to lower cost of capital for the various business organisation and ultimately it would be eventually leading into stimulation of the demand into the economy and generation of the credit into the economy which is a dire need at the time of coronavirus crisis because there is a very low growth estimation and there is a very low demand in the economy so Reserve Bank of Australia needs to cut down on its cash rate in order to increase the demand along with increase the expected inflation in the economy and it would be likely to impact the exports on the positive side so cutting down of the cash rate is the most probable thing which is to be done by the Reserve Bank of Australia as it would be a stabilizing the entire economy.