The RBA has decreased the official cash rate recently and now it stands at 4.50 percent. It is expected that the RBA may decrease the cash rate even further in the future.
What is the difference between the official cash rate and the market rate of interest?
Explain the mechanism by which the RBA decreases the cash rate. Use appropriate diagrams where necessary. 6 marks
Analyse, using diagrams, the effects of a decrease in the interest rate on consumption and investment expenditures, and the level of aggregate demand. How do you think a fall in the interest rate may affect the inflation rate and the unemployment rate? 6 marks
Explain how the credit creation process of the commercial banks may be changed by the monetary policy. Be sure to state whether the changes are contractionary or expansionary and explain why the RBA would adopt this strategy 6 marks
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