Question

QUESTION 12 If inflation is too high, the RBA will the RBA can intervene via open market (increase / decrease) its cash rate target. If the actual cash rate remains below the target, (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 The described change in nominal interest rates is also affecting the real interest rate if prices are flexible). The change in real interest rates will cause businesses and households to thus dampen inflation. (temporary/ permanent) (somewhat sticky/ totally (cut back /increase) their spendings and

RBA is the central bank

Answer 1

1) increase

Inflation is high because of too much liquidity in the economy. This can be controlled by making borrowing more expensive i.e. increasing interest rates.

2)purchases

By purchasing bonds, the RBA is able to increase demand for bonds and thus raise interest rate.

3) up

The increase in cash rate rate shifts up the yield curve.

4) short

Since the people are not yet convinced if the increase in cash rates are permanent, it is still a short run phenomenon.

5) permanent

Only if people are convinced that the increase in interest rates is permanent, they shift their expectations in the long run.

6) sticky

If prices are sticky, they will not change in line line with increase in money supply due to which the effect will be real.

7) cut back

By cutting back spending, the reduce money circulation in economy reducing inflation.