Suppose the Reserve Bank raises the cash rate. Put the following changes in the order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards:
i. Short-term interest rates rise.
ii. Long-term interest rate rises.
iii. Aggregate demand decreases.
iv. Inflation rate decreases.

Question

Quizplus · Accepted Answer

When the Reserve Bank raises the cash rate, short-term interest rates rise almost immediately as banks adjust their rates. Over time, this influences long-term interest rates to rise as well. The increase in interest rates makes borrowing more expensive, which tends to decrease aggregate demand. Finally, as demand decreases, the inflation rate may decrease, but this effect can take up to two years to materialize fully.

Suppose the Reserve Bank Raises the Cash Rate