Monetary Policy Quiz 2

Which of the following events is most likely to make the RBA consider a tightening of monetary policy?

• A. A rise in the value of the Australian dollar

• B. Stronger growth in the world economy

• C. Rising levels of unemployment

• D. An increase in the size of the budget surplus

Which combination of policy actions is most likely to assist in the achievement of economic growth?

• A. A reduction on the target cash rate, greater investment spending by the government and higher company taxes

• B. A rise in the target cash rate, greater investment spending by the government and lower marginal tax rates

• C. A rise in the target cash rate, greater investment spending by the government and lower company tax rates

• D. A reduction of the target cash rate, greater investment spending by the government and lower marginal tax rates

Which of the following is least likely to be a target of monetary policy?

• A. Increasing the rates of economic growth to between 3% and 4%

• B. Lowering rates of unemployment to approximately 4.25%

• C. Price stability or low growth in the consumer price index

• D. A low rate of inflation equal to 0% on average over time

With respect to the actual cash rate and the target cash rate

• A. The actual cash rate will always be close to the target cash rate

• B. The actual cash rate will always equal the target cash rate

• C. The actual cash rate will always be above the target cash rate

• D. The actual cash rate will always be below the target cash rate

Which of the following occurrences is least likely to contribute to a loosening of monetary policy?

• A. An increase in the terms of trade

• B. Low levels of consumer confidence

• C. Relatively high rate of labour force underutilisation

• D. Slow growth in wages

Which of the following is not a generally accepted transmission channel associated with a loosening of monetary policy?

• A. A fall in the value of the Australian dollar, boosting net exports

• B. A fall in savings and an increase in consumption and investment

• C. A fall in interest rates leading to an increase in the exchange rate which reduces net exports

• D. A rise in discretionary income of households which helps to increase consumption

Where the underlying inflation rate is higher than the RBA target rate of inflation, the RBA will:

• increase funds in the Exchange Settlement Accounts of banks leading to increases in interest rates.

• increase funds in the Exchange Settlement Accounts of banks leading to decreases in interest rates.

• decrease funds in the Exchange Settlement Accounts of banks leading to decreases in interest rates.

• decrease funds in the Exchange Settlement Accounts of banks leading to increases in interest rates.

In times of low and subdued economic growth and employment growth, the RBA will:

• decrease the supply of money in the money market by purchasing government securities

• increase the supply of money in the money market by purchasing government securities

• decrease the supply of money in the money market by selling government securities

• increase the supply of money in the money market by selling government securities.

To tighten monetary policy and increase the cash rate, the RBA will immediately announce a higher target cash rate. If the market does not automatically adjust, the RBA must manipulate the cash market to ensure that the actual cash rate increases towards the target. It does this by

• buying government securities or repos from cash market participants by offering to pay a higher price for the security

• selling government securities or repos to cash market participants by offering to sell them at a higher price

• buying government securities or repos from cash market participants by offering to pay a low price for the security

• selling government securities or repos to cash market participants by offering to sell them at a cheaper price

A tightening of monetary policy will involve the RBA

• announcing a decrease in the target cash rate and then decreasing liquidity in the cash market

• announcing an increase in the target cash rate and then increasing liquidity in the cash market

• announcing an increase in the target cash rate and then decreasing liquidity in the cash market

• announcing a decrease in the target cash rate and then increasing liquidity in the cash market