Question

• Interest rates are at historic lows in many countries—in some cases, close to zero. How is expansionary monetary policy, or more specifically an open market purchase, supposed to work? How do near-zero interest rates limit the ability of expansionary monetary policy to work?
• In your opinion, how effective has the Australian Government’s policy been as a response to the economic downturn due to the Covid-19 situation? What evidence can you suggest to support your position?

Answer 1

Expansionary monetary policy by cutting interest rates sharply and open market purchase helps injection pf liquidity to corporates and household and thus leads to rise in employment opportunities which raises disposable incomes and thus boosts consumption and aggregate demand which helps rise in real GDP and prices.

However, near zero interest rates limits central banks ability to cut further as this will lead to negative interest rates which will penalise savings and thus not bring intended consumption and spending which can lead to fall in real GDP.

Australian government has impised seeies of tax cuts, fostered government spending, relaxed payment norms amd extended payments horizon for business and tax purposes, brought structural reforms whuch all gave phillip to consumption and demand and thus led to lower shrinkage of real GDP.

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