The Reserve Bank focuses much of its attention on the level of underlying inflation in the Australian economy.What are the important implications of a low level of underlying inflation for the markets?

Question

Quizplus · Accepted Answer

A low level of underlying inflation can indicate a stable economy and can lead to increased business confidence and capital investment. This can be positive for the markets.

Answer: A
 A low level of underlying inflation can restrict the potential for future economic growth and business investment as it may lead to deflationary pressures and reduce demand for goods and services.

Answer: D
 A low level of underlying inflation can add to expectations of significant future interest rate increases as the Reserve Bank may need to tighten monetary policy to stimulate inflation. This can have negative impacts on the markets.

B is incorrect as the Reserve Bank may actually need to adopt looser monetary policy to stimulate inflation if it is too low.

The Reserve Bank Focuses Much of Its Attention on the Level