Question 1

A potential problem with adopting an inflation-control target i.is that the Reserve Bank will raise interest rates and push the economy into recession.
Ii)is that it provides an anchor for future expectations of inflation.
Iii)is that Reserve Bank policy actions are hidden from financial markets.

Accepted Answer

Raising interest rates to control inflation can potentially slow down economic growth, leading to a recession.

Question 2

Which of the following are the tools used by the Reserve Bank to move the actual cash rate to the target cash rate?
i.Open market operations
ii.The interest rate on exchange settlement balances
iii.Selling foreign reserves

Accepted Answer

The Reserve Bank uses open market operations (i) to buy or sell government securities which affects the cash reserves of commercial banks thereby influencing the actual cash rate. The interest rate on exchange settlement balances (ii) is the rate at which commercial banks can hold funds with the Reserve Bank and this rate is directly linked to the target cash rate, so changes in the latter affect the former. Selling foreign reserves (iii) is not a tool used by the Reserve Bank to move the actual cash rate to the target cash rate.

Question 3

The main objectives of monetary policy include all of the following EXCEPT

Accepted Answer

The main objectives of monetary policy typically include currency stability, full employment, economic prosperity, and controlling inflation. Keeping the long-term nominal interest rate equal to the real interest rate plus the inflation rate is not a direct objective of monetary policy.

Question 4

The Reserve Bank can decide to control the quantity of the monetary base or its price.The monetary base has two prices:

Accepted Answer

The monetary base's prices are the cash rate in the inter-bank overnight loans market, which is the interest rate for overnight loans between banks, and the exchange rate, which is the price of one currency in terms of another.

Question 5

The Taylor rule is an example of

Accepted Answer

The Taylor rule is an instrument rule that provides guidelines for setting the cash rate (interest rate) based on economic conditions like inflation and output gap.

Question 6

The Reserve Bank pays interest on banks' reserve deposits,called exchange settlement accounts,equal to the cash rate less 0.25 per cent.This puts a ________ on the cash rate as it can't fall more than ________ below the cash rate.

Accepted Answer

The interest paid on exchange settlement accounts acts as a floor on the cash rate, as banks would not lend at a rate lower than what they can earn on their reserves, which is the cash rate minus 0.25%.

Question 7

The interest rate in the inter-bank loans market is called the

Accepted Answer

The interest rate in the inter-bank loans market is called the cash rate, which is the rate at which banks lend to each other overnight to manage their own reserve requirements.

Question 8

Currently the Reserve Bank targets

Accepted Answer

The Reserve Bank of Australia's main monetary policy tool is the cash rate, which determines the interest rates that banks and other financial institutions pay or charge on loans and deposits. By setting the cash rate target, the Reserve Bank aims to achieve its objectives of promoting price stability, full employment, and the economic welfare of the people of Australia. Therefore, the correct answer is E, the cash rate.

Question 9

Which of the following statements are correct?
i.The Reserve Bank has responsibility for the conduct of monetary policy.
ii.The Commonwealth government determines monetary policy.
iii.The Reserve Bank Act requires regular consultation on monetary policy between the governor and the treasurer.

Accepted Answer

The Reserve Bank has responsibility for the conduct of monetary policy (i) and the Reserve Bank Act requires regular consultation on monetary policy between the governor and the treasurer (iii). The Commonwealth government does not determine monetary policy (ii).

Question 10

An instrument rule is based on ________ of the economy while a targeting rule is based on ________ of the economy.

Accepted Answer

The answer of An instrument rule is based on ________...

Question 11

The monetary policy instrument the Reserve Bank chooses to use is the

Accepted Answer

The cash rate is the main monetary policy instrument used by the Reserve Bank of Australia to achieve its monetary policy objectives. It refers to the interest rate charged on overnight loans between financial institutions, and changes in the cash rate influence borrowing and lending rates in the economy, which in turn affect spending and investment decisions by households and businesses.

Question 12

The benefit of adopting an inflation-control target i.is that the Reserve Bank's policy actions are clearly understood in financial markets.
Ii)is that it provides an anchor for future expectations of inflation.
Iii)is that Reserve Bank policy actions are hidden from financial markets.

Accepted Answer

Option i is correct as having a transparent inflation-control target allows financial markets to anticipate the actions of the Reserve Bank, which can help to reduce volatility. Option ii is also correct as an inflation-control target provides a clear framework for managing and maintaining inflation expectations. Option iii is incorrect as the purpose of an inflation-control target is to increase transparency and predictability, not to hide policy actions from financial markets.

Question 13

A prerequisite for achieving the objectives of monetary policy is

Accepted Answer

Achieving financial stability is a necessary condition for monetary policy to achieve its objectives. Financial stability ensures that financial markets function normally and allocate capital resources and risk, which are crucial for sustainable economic growth. Without financial stability, monetary policy may not be effective in achieving its objectives, such as controlling inflation and promoting economic growth. The other options listed are either not directly related or not sufficient for achieving the objectives of monetary policy.

Question 14

Which of the following are policy instruments available to the Reserve Bank as it tries to achieve its macroeconomic goals?
i.Government expenditure on goods and services and taxes.
ii.The government budget deficit or surplus.
iii.Changes in the cash rate.

Accepted Answer

The Reserve Bank primarily uses monetary policy instruments to achieve its macroeconomic goals, one of which is adjusting the cash rate. Government expenditure and taxes, as well as the budget deficit or surplus, are fiscal policy tools, typically managed by the government, not the central bank.

Question 15

An inflation-targeting monetary policy strategy is when

Accepted Answer

In an inflation-targeting monetary policy strategy, the central bank sets an explicit target for the inflation rate and adjusts its policies to achieve that target. This approach has become popular among many central banks around the world in recent decades. Option A is incorrect because controlling the money supply is not necessarily the goal of an inflation targeting policy, and could be a means to achieve the inflation target. Option B is incorrect because targeting government debt is not related to the goal of stabilizing prices or inflation. Option C is incorrect because committing to reduce unemployment below the natural rate could lead to higher inflation, which is not consistent with an inflation targeting policy.

Question 16

The Reserve Bank monetary policy objective is

Accepted Answer

The Reserve Bank's monetary policy objective is to keep consumer price inflation between 2 and 3 per cent over the business cycle. This target is considered to be consistent with both price stability and the sustainable growth of the economy. Keeping inflation within this range helps to maintain confidence in the value of money and supports strong and sustainable economic growth.

Question 17

Which of the following is a monetary policy goal?
i.Keeping the inflation rate in the target of 2 to 3 per cent.
ii.Attaining minimum employment.
iii.The stability of the currency in Australia.

Accepted Answer

Keeping the inflation rate in the target of 2 to 3 per cent and the stability of the currency in Australia are both monetary policy goals. Attaining minimum employment is a macroeconomic goal that falls under the domain of fiscal policy.

Question 18

Which of the following is a potential monetary policy instrument for the Reserve Bank?

Accepted Answer

The cash rate is a potential monetary policy instrument for the Reserve Bank as it is the interest rate that banks pay or receive on overnight loans in order to manage their daily cashflow. The Reserve Bank can increase or decrease this rate to influence borrowing and lending behaviors, which in turn can affect economic activity and inflation.

Question 19

Control of monetary policy rests with

Accepted Answer

The Reserve Bank of Australia (RBA) is responsible for formulating and implementing monetary policy in Australia. The RBA has autonomy in conducting monetary policy, and its decisions are not subject to approval by the government or the parliament. The Federal Treasury, Senate, and Parliament can influence monetary policy through their actions or policies, but they do not have direct control over it. The Prime Minister also does not have direct control over monetary policy, although he or she can appoint the Governor of the RBA, who plays a key role in the decision-making process.

Question 20

To determine whether the goal of stable prices is being achieved,the Reserve Bank monitors

Accepted Answer

The Reserve Bank often uses the trimmed-mean CPI as it provides a measure of core inflation by excluding the most volatile items, offering a clearer view of underlying inflation trends.

Quiz 15: Monetary Policy

A potential problem with adopting an inflation-control target i.is that the Reserve Bank will raise interest rates and push the economy into recession. Ii) is that it provides an anchor for future expectations of inflation. Iii) is that Reserve Bank policy actions are hidden from financial markets.

Which of the following are the tools used by the Reserve Bank to move the actual cash rate to the target cash rate? i.Open market operations ii.The interest rate on exchange settlement balances iii.Selling foreign reserves

The main objectives of monetary policy include all of the following EXCEPT

The Reserve Bank can decide to control the quantity of the monetary base or its price.The monetary base has two prices:

The Taylor rule is an example of

The Reserve Bank pays interest on banks' reserve deposits,called exchange settlement accounts,equal to the cash rate less 0.25 per cent.This puts a on the cash rate as it can't fall more than below the cash rate.

The interest rate in the inter-bank loans market is called the

Currently the Reserve Bank targets

Which of the following statements are correct? i.The Reserve Bank has responsibility for the conduct of monetary policy. ii.The Commonwealth government determines monetary policy. iii.The Reserve Bank Act requires regular consultation on monetary policy between the governor and the treasurer.

An instrument rule is based on of the economy while a targeting rule is based on of the economy.