Question

If inflation is too high, the RBA will __________ (increase / decrease) its cash rate target. If the actual cash rate remains below the target, the RBA can intervene via open market _____________ (purchases / sales] of bonds. The yield curve is likely to shift __________ (up / down), especially at its ___________ (short / long) end. The impact on the long end of the yield curve can be strengthened by convincing market participants that the new cash rate target will be somewhat ____________ (temporary / permanent). The described change in nominal interest rates is also affecting the real interest rate if prices are ___________ (somewhat sticky / totally flexible). The change in real interest rates will cause businesses and households to ____________ (cut back / increase) their spendings and thus dampen inflation.

Answer 1

Ans

A in rease because it increases cost of credit and thus lowers inflation

B sale so that money supply falls and thus cash rate rises

C down at short end

D permenant. Expectations that changes will occur in short run only leads to short run effect mainly

E flexible. Note real interest rate=nominal interest rate minus inflation

F UT because cost of borrowing has risen