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 is a tool used by the central bank to increase the money supply in the economy. It is done through open market operations, changing reserve requirements or interest rates. Open market operations are carried out by a central bank to change the money supply. For instance, to increase the money supply, the Federal Reserve purchases bonds from banks which will lead to injection of money into the economy. When the interest rates are near zero, it limits the ability of expansionary monetary policy like open market operations to increase the money supply in the economy.

The Australian Government has timely responded to limit the impact of Covid 19 on the economy. Firstly, they have introduced a fund to support mental health of the Australian citizens. The government is planning to reduce the taxes, support pensioners, invest in infrastructure to support households. Taxes have been cut for households and businesses which will help economic recovery. A fund has been set up by the government to support various industries like agriculture sector.