Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n nT and u

Question

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n > nT and u < un. Given this information, we would expect that the RBA will:
A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a revaluation.
E) More information is needed to answer this question.

Quizplus · Accepted Answer

The Taylor rule suggests that if actual inflation (n) is above the target inflation rate (nT) and unemployment (u) is below the natural rate of unemployment (un), the central bank should raise interest rates to cool down the economy, which is an action consistent with implementing a monetary contraction.

Assume That the RBA Sets Monetary Policy According to the Taylor