Question

Which of the following describes what the Reserve Bank of Australia would do to pursue an contractionary monetary policy? Use open market operations to buy bonds and securities. Use open market operations to sell bonds and securities Use open market operations to increase the overnight cash rate. Increase interest rates on mortgages and corporate loans.

Answer 1

1).

Reserve Bank of Australia would pursue “open market operation” for contractionary monetary policy, => will sell bonds and securities in exchange of money, => the money supply in an economy decreases. So, “B” is the correct answer.

2).

The Reserve Bank of Australia manages the supply of cash on daily basis to ensure that there are no large injections of cash into or withdrawals of cash out of the financial system. So, here the correct “is C”.

3).

So, as the Reserve Bank of Australia sells bonds and securities in the open market in exchange of cash, => money supply decreases, => domestic interest rate increases, => under UIP exchange rate have to decrease, => appreciation of home currency. Under UIP the following condition must hold.

=> ih = if + d, where “d=(Ee-E)/E” is the expected depreciation of home currency, => if “ih” increases implied “E” should decrease to maintain the above equality. So, here the correct answer is “A”.

4).

So, here we can see that “real GDP” is less than the “potential GDP”, => is RBA take expansionary monetary policy, => that will increase the “AD”, => given the “AS” both “P” and “real GDP” both increases. So, here the correct answer is “C”.