If the RBA believes inflation will rise to 7 per cent over the next few months, its likely response will be to:
A) buy government securities from banks to decrease interest rates.
B) buy government securities from banks to increase interest rates.
C) sell government securities to banks to increase interest rates.
D) sell government securities to banks to decrease interest rates.

Question

Quizplus · Accepted Answer

Inflation is a rise in general prices of goods and services in an economy over time. The RBA's primary mandate is to maintain price stability, which means keeping inflation between 2% and 3%. If inflation is expected to rise to 7%, it suggests that there is excess demand in the economy, and the RBA needs to take action to reduce it. One way to do this is by increasing interest rates, which makes borrowing more expensive, reducing demand for goods and services, and, in turn, reducing inflation. To increase interest rates, the RBA would need to sell government securities to banks, reducing the amount of money in circulation and increasing the cost of borrowing. Therefore, the best choice is C.

If the RBA Believes Inflation Will Rise to 7 Per