Deck 12: Monetary Policy

Question 1

The money demand curve is downward sloping because lower interest rates:

A)lower the opportunity cost of holding money and cause households and firms to switch from money to financial assets.
B)lower the opportunity cost of holding money and cause households and firms to switch from financial assets to money.
C)raise the opportunity cost of holding money and cause households and firms to switch from money to shares.
D)raise the opportunity cost of holding money and cause households and firms to switch from money to bonds.

Answer 1

lower the opportunity cost of holding money and cause households and firms to switch from financial assets to money.

Question 2

What economic objectives are the Reserve Bank of Australia required to pursue in its conduct of monetary policy and what relative importance is placed on these objectives?
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Answer 2

Under the Reserve Bank Act (1959), the objectives of the central bank are full employment, stability of the currency and the prosperity and welfare of the Australian people. Since the early 1990s, the primary objective has been the stability of the currency; in other words, achieving low levels of inflation. In the short run, this may require a degree of trade off of the other objectives. Increases in inflation are controlled by tightening of monetary policy, which tends in the short-term to reduce the rate of economic growth and raise unemployment. However, it is believed that achieving the objective of low inflation will in the long run allow the other objectives of economic prosperity and low unemployment to be fulfilled. The target set for the inflation rate since the 1993 has been an average over the business cycle of 2%-3% inflation and since its adoption, this policy of inflation targeting has been very successful in achieving low inflation alongside strong economic growth.

Question 3

If the interest rate increases, then:

A)there will be an upward movement along the money demand curve.
B)there will be a downward movement along the money demand curve.
C)the money demand curve will shift to the right.
D)the money demand curve will shift to the left.

Answer 3

there will be an upward movement along the money demand curve.

Question 4

Which of the following are goals of monetary policy?

A)maximising the value of the dollar relative to other currencies, economic growth and high employment
B)price stability, maximising the value of the dollar relative to other currencies and high employment
C)price stability, economic growth and high employment
D)price stability, economic growth and maximising the value of the dollar relative to other currencies

Question 5

The Board of the Reserve Bank of Australia has stated that they focus on which of the following as their main goal of monetary policy?

A)stability of financial markets
B)low inflation
C)economic growth
D)high labour force participation rate

Question 6

The main goal of monetary policy in Australia is a low inflation rate.

Question 7

Which of the following is the main goal of monetary policy in Australia?

A)lowering the rate of unemployment
B)increasing the value of the Australian dollar relative to other currencies
C)economic growth
D)price stability

Question 8

One goal of monetary policy (according to the Reserve Bank Act (1959))is:

A)maintaining a strong exchange rate for the dollar relative to other currencies.
B)a high rate of unemployment.
C)price stability.
D)a high rate of employment.

Question 9

Because money serves as a medium of exchange, an increase in real GDP:

A)increases the buying and selling of goods and services and so increases the demand for money.
B)increases the buying and selling of goods and services and so decreases the demand for money.
C)decreases the buying and selling of goods and services and so increases the demand for money.
D)decreases the buying and selling of goods and services and so decreases the demand for money.

Question 10

The Reserve Bank of Australia's main monetary policy target is:

A)the money supply.
B)the inflation rate.
C)real GDP.
D)the unemployment rate.

Question 11

The Reserve Bank of Australia targets a per annum inflation rate, on average over the business cycle, of between:

A)1% and 2%.
B)2% and 4%.
C)3% and 4%.
D)2% and 3%.

Question 12

Inflation targeting is when the Reserve Bank of Australia uses monetary policy with the aim of keeping the inflation rate at an annual average of between 2% and 3% in the medium term.

Question 13

Maintaining a strong exchange rate for the dollar in international currency markets is one of the monetary policy goals of the Reserve Bank of Australia.

Question 14

Money demand will increase if the price level ________ or if real GDP ________.

A)increases; decreases
B)decreases; decreases
C)increases; increases
D)decreases; increases

Question 15

According to the Reserve Bank of Australia, inflation targeting refers to monetary policy that aims to:

A)achieve a particular annual rate of inflation on average over the business cycle.
B)achieve the same low rate of inflation every year.
C)control the money supply to achieve a target rate of inflation.
D)control the money supply to achieve a target rate of interest that will ensure a low rate of inflation.

Question 16

Give an example of a monetary policy target. Explain which monetary policy target the Reserve Bank of Australia (RBA)uses and why the RBA uses a policy target.
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Question 17

What is 'inflation targeting'?
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Question 18

Rising prices erode the value of money as a ________ and a ________.

A)unit of barter; unit of account
B)store of value; unit of liquidity
C)medium of exchange; store of value
D)store of value; unit of barter

Question 19

The policy aimed at managing interest rates to pursue macroeconomic objectives is called:

A)fiscal policy.
B)interest rate policy.
C)monetary policy.
D)exchange rate policy.

Question 20

The money demand curve has a:

A)negative slope.
B)positive slope.
C)zero slope and is perfectly elastic.
D)positive slope for low levels of money demand and a negative slope for high levels of money demand.

Question 21

Refer to Figure 12.1 for the following question.
Figure 12.1

Refer to Figure 12.1. In this figure, the money demand curve would move from Money demand₁ to Money demand₂ if:

A)real GDP decreased.
B)the price level increased.
C)the interest rate increased.
D)the Reserve Bank of Australia sold government securities.

Question 22

Accounts held with the Reserve Bank of Australia (RBA)which are used by financial institutions to settle payments between each other and with the RBA are called:

A)credit accounts.
B)real-time gross settlement accounts.
C)debit accounts.
D)exchange settlement accounts.

Question 23

The overnight cash rate is determined:

A)administratively by the Reserve Bank of Australia.
B)by the supply of and demand for cash.
C)directly by household demand for funds.
D)directly by firm demand for funds.

Question 24

Refer to Figure 12.2 for the following question.
Figure 12.2

Refer to Figure 12.2. In this figure, a movement from point A to point B would be caused by:

A)a decrease in real GDP.
B)an increase in the price level.
C)a decrease in the price level.
D)an increase in the interest rate.

Question 25

'Monetary policy' targets the:

A)long-term real rate of interest.
B)long-term nominal rate of interest.
C)short-term real rate of interest.
D)short-term nominal rate of interest.

Question 26

The 'cash rate' is the interest rate:

A)the Reserve Bank of Australia charges commercial banks.
B)banks charge their largest customers.
C)banks charge each other for overnight loans.
D)on a government bond or security.

Question 27

Open market operations occur when the Reserve Bank of Australia:

A)purchases or sells corporate shares in the market to control interest rates.
B)controls the money supply.
C)makes loans to foreign banks.
D)purchases or sells short-dated financial instruments.

Question 28

If real GDP decreases:

A)the money demand curve will shift to the right.
B)the money demand curve will shift to the left.
C)there will be an upward movement along the money demand curve.
D)there will be a downward movement along the money demand curve.

Question 29

Which of the following correctly describes what the Reserve Bank of Australia (RBA)used as monetary targets in the past?

A)The RBA used M3 as its main target after 1993.
B)The RBA focused on base money as a target after the deregulation of the financial system.
C)The RBA increased its reliance on interest rate targets since the early 1990s.
D)After 1996, the RBA focused on monetary targeting.

Question 30

A decrease in real GDP can:

A)increase money demand and decrease the interest rate.
B)increase money demand and increase the interest rate.
C)decrease money demand and decrease the interest rate.
D)decrease money demand and increase the interest rate.

Question 31

In the 1970s and 1980s, which method did the Reserve Bank of Australia use in conducting monetary policy?

A)interest rate targeting
B)inflation targeting
C)monetary targeting
D)employment rate targeting

Question 32

The money supply curve would be perfectly inelastic if:

A)banks and the RBA jointly determine the money supply.
B)the RBA is able to completely fix the money supply.
C)banks and households determine the money supply.
D)households and the RBA jointly determine the money supply.

Question 33

An increase in real GDP will __________ the demand for money and ____________the equilibrium interest rate.

A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase

Question 34

The money market model is concerned with ________ and the loanable funds market model is concerned with ________.

A)short-term real interest rates; long-term nominal interest rates
B)short-term nominal interest rates; long-term nominal interest rates
C)short-term real interest rates; long-term real interest rates
D)short-term nominal interest rates; long-term real interest rates

Question 35

The Reserve Bank of Australia uses open market operations:

A)usually every day.
B)once a month when the Reserve Bank Board meets to discuss monetary policy.
C)only when it wants to increase or decrease the cash rate.
D)only when it is conducting monetary policy.

Question 36

The Reserve Bank of Australia manages the supply of cash on a daily basis to:

A)ensure that banks have sufficient cash to meet the demand for funds.
B)sterilise deficits and surpluses of cash in the financial system.
C)ensure that there are no large injections of cash into or withdrawals of cash out of the financial system.
D)ensure that the interest rate changes to create equilibrium in the money market.

Question 37

If the central bank uses interest rate targeting, the money supply is:

A)perfectly inelastic at the current interest rate.
B)targeted by the use of open market operations.
C)fixed by the Reserve Bank of Australia.
D)perfectly elastic at the current interest rate.

Question 38

Which of the following does the Reserve Bank of Australia use as its main measure of monetary movements in Australia?

A)credit
B)the cash rate
C)the money supply
D)the demand for money

Question 39

The Reserve Bank of Australia can increase the cash rate by:

A)borrowing from the banks using reverse repurchase agreements.
B)purchasing bonds and securities, which increases banks' reserves.
C)lending cash to banks using repurchase agreements.
D)purchasing bonds and securities, which decreases banks' reserves.

Question 40

If the price level increases:

A)there will be an upward movement along the money demand curve.
B)there will be a downward movement along the money demand curve.
C)the money demand curve will shift to the right.
D)the money demand curve will shift to the left.

Question 41

Falling interest rates can:

A)increase a firm's share price, which causes firms to issue more shares and thus increases funds for investment.
B)raise the cost of borrowing for firms and decrease investment.
C)raise the cost of buying new homes and fewer new homes will be purchased.
D)lower the cost of buying new homes and fewer new homes will be purchased.

Question 42

Explain how the Reserve Bank of Australia maintains its targeted cash rate on a daily basis.
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Question 43

Rising real GDP will increase the demand for money and short-term interest rates.

Question 44

The Reserve Bank of Australia engages in open market operations only when it wants to change interest rates.

Question 45

A rise in the rate of interest on financial securities will lead to a movement downward along the money demand curve.

Question 46

What is the function of 'exchange settlement accounts'?
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Question 47

For over a decade, monetary policy in Australia has been carried out mainly by using repurchase agreements rather than the outright purchase of government securities.

Question 48

If interest rates rise, this will _________ the cost of buying new homes, so ________ new homes will be purchased thereby reducing ___________ expenditures.

A)lower; more; consumption
B)raise; fewer; consumption
C)raise; fewer; investment
D)lower; more; investment

Question 49

When the Reserve Bank of Australia raises the cash rate, this normally leads to:

A)other interest rates rising, which stimulates consumption spending.
B)people spending less because they have less money.
C)other interest rates falling, which stimulates investment spending.
D)other interest rates rising, which reduces investment spending.

Question 50

The effect of monetary policy on long-term interest rates is usually:

A)larger than its effect on short-term interest rates.
B)smaller than its effect on short-term interest rates.
C)immediate, as long-term rates are closely linked to the cash rate.
D)larger than its effect on short-term rates, but the effect occurs with a lag.

Question 51

A decrease in interest rates will usually:

A)decrease investment spending.
B)increase consumption spending.
C)decrease government spending.
D)decrease net exports.

Question 52

A decrease in the supply of cash on the overnight money market will lead to a(n)____________ in interest rates and a(n)_________ in investment expenditure.

A)decrease; decrease
B)increase; decrease
C)decrease; increase
D)increase; increase

Question 53

An increase in the supply of cash on the overnight money market will lead to a(n)____________ in interest rates and a(n)_________ in investment expenditure.

A)decrease; decrease
B)increase; decrease
C)decrease; increase
D)increase; increase

Question 54

How does the Reserve Bank of Australia affect the supply of cash?
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Question 55

Not all households are net borrowers. For households that are net lenders, an increase in interest rates will:

A)decrease current consumption if the income effect is greater than the substitution effect.
B)decrease saving if the substitution effect is greater than the income effect.
C)increase current consumption if the substitution effect is greater than the income effect.
D)increase current consumption if the income effect is greater than the substitution effect.

Question 56

If the Reserve Bank of Australia sells bonds and securities in the open market, this is likely to lead to a ______ in interest rates and a(n)_______ of the Australian dollar.

A)rise; appreciation
B)rise; depreciation
C)fall; appreciation
D)fall; depreciation

Question 57

The Reserve Bank of Australia currently conducts monetary policy by controlling the money supply.

Question 58

Describe how the Reserve Bank of Australia uses open market operations to change short-term and long-term interest rates.
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Question 59

Lowering the interest rate will normally:

A)decrease spending on consumer durables.
B)increase investment projects by firms.
C)decrease spending on new homes.
D)decrease the value of the dollar and lower net exports.

Question 60

Explain why the 'money demand curve' is downward sloping.
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Question 61

From an initial long-run macroeconomic equilibrium, if the Reserve Bank of Australia anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the RBA would most likely:

A)increase income tax rates.
B)decrease income tax rates.
C)increase interest rates.
D)decrease interest rates.

Question 62

Assuming that all else remains constant, contractionary monetary policy causes aggregate demand to:

A)rise by less than it otherwise would have and the price level to rise by less than it otherwise would have.
B)fall by less than it otherwise would have and the price level to rise by less than it otherwise would have.
C)rise by more than it otherwise would have and the price level to rise by less than it otherwise would have.
D)fall by more than it otherwise would have and the price level to rise by more than it otherwise would have.

Question 63

If the Reserve Bank of Australia raises its target for the cash rate, this indicates that it is:

A)pursuing an expansionary monetary policy.
B)pursuing a contractionary monetary policy.
C)attempting to combat deflation.
D)concerned that the growth in aggregate demand is too slow to keep up with changes in potential GDP.

Question 64

If the Reserve Bank of Australia lowers the interest rate, this will: ________ inflation and ________ the rate of growth of real GDP in the short run.

A)reduce; lower
B)reduce; raise
C)increase; lower
D)increase; raise

Question 65

A rise in domestic interest rates relative to interest rates in other countries may lead to an exchange rate:

A)depreciation and an increase in net exports.
B)depreciation and a decrease in net exports.
C)appreciation and an increase in net exports.
D)appreciation and a decrease in net exports.

Question 66

Which of the following characterises the ability of the Reserve Bank of Australia (RBA)to prevent recessions?

A)The RBA is able to 'fine tune' the economy and entirely eliminate recessions.
B)The RBA is incapable of changing aggregate demand through its monetary policy tools.
C)The RBA may be able to keep a recession shorter and milder than it would otherwise be.
D)The RBA may be able to eliminate the business cycle and achieve absolute price stability.

Question 67

Refer to Figure 12.3 for the following question.
Figure 12.3

Refer to Figure 12.3. In this figure, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Reserve Bank of Australia use to move the economy to point C?

A)decrease income taxes
B)increase government spending
C)buy financial securities
D)sell financial securities

Question 68

Which of the following describes what the Reserve Bank of Australia would do to pursue an expansionary monetary policy?

A)Use open market operations to buy bonds and securities.
B)Use open market operations to sell bonds and securities.
C)Use open market operations to increase the overnight cash rate.
D)Increase interest rates on mortgages and corporate loans.

Question 69

A contractionary monetary policy would be more effective if it caused:

A)interest rates to increase, leading to an exchange rate appreciation and a fall in net exports.
B)interest rates to decrease, leading to an exchange rate appreciation and a fall in net exports.
C)interest rates to decrease, leading to an exchange rate depreciation and a rise in net exports.
D)interest rates to increase, leading to an exchange rate depreciation and a rise in net exports.

Question 70

Refer to Table 12.1 for the following question.
Table 12.1

Refer to Table 12.1. Consider the hypothetical information in the table for potential GDP, real GDP and the price level in 2016 and in 2017 if the Reserve Bank of Australia does not use monetary policy. If the Reserve Bank of Australia wants to keep real GDP at its potential level in 2017, it should:

A)buy government securities.
B)sell government securities.
C)increase interest rates.
D)increase income taxes.

Question 71

An expansionary monetary policy would be more effective if it caused:

A)interest rates to increase, leading to an exchange rate appreciation and a fall in net exports.
B)interest rates to decrease, leading to an exchange rate appreciation and a fall in net exports.
C)interest rates to decrease, leading to an exchange rate depreciation and a rise in net exports.
D)interest rates to increase, leading to an exchange rate depreciation and a rise in net exports.

Question 72

Refer to Figure 12.4 for the following question.
Figure 12.4

Refer to Figure 12.4. In this figure, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Reserve Bank of Australia would be to:

A)lower interest rates.
B)raise interest rates.
C)lower income taxes.
D)raise income taxes.

Question 73

Refer to Figure 12.5 for the following question.
Figure 12.5

Refer to Figure 12.5. In this figure, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Reserve Bank of Australia use to move the economy to point C?

A)decrease income taxes
B)increase government spending
C)buy financial securities
D)sell financial securities

Question 74

The Reserve Bank of Australia:

A)can easily distinguish the minor ups and downs of the economy from a recession.
B)can have difficulty shifting aggregate demand to keep the economy at its potential GDP level.
C)always times its policy responses correctly.
D)can easily determine if a drop in production means a recession is inevitable.

Question 75

When the RBA uses contractionary policy:

A)the price level rises by more than it would if the RBA did not pursue policy.
B)the price level rises by less than it would if the RBA did not pursue policy.
C)it does not change the price level.
D)it causes inflation.

Question 76

If the Reserve Bank of Australia's policy is described as 'contractionary', then it would:

A)use open market operations to buy financial securities.
B)use open market operations to sell financial securities.
C)reduce the overnight cash rate.
D)increase the level of liquidity in the financial market.

Question 77

Which of the following situations is one in which the Reserve Bank of Australia will potentially pursue expansionary monetary policy?

A)Potential GDP is forecast to be higher than equilibrium GDP.
B)Potential GDP is forecast to be lower than equilibrium GDP.
C)Aggregate demand is growing too fast to keep the economy at full employment.
D)Aggregate demand is growing too slowly and the economy is in danger of producing GDP above full employment.

Question 78

If the Reserve Bank of Australia lowers its target for the cash rate, this indicates that it is:

A)pursuing an expansionary monetary policy.
B)pursuing a contractionary monetary policy.
C)attempting to combat inflation.
D)concerned that the growth in aggregate demand will exceed potential GDP.

Question 79

If the Reserve Bank of Australia buys bonds and securities in the open market, this is likely to lead to a ______ in interest rates and a(n)_______ of the Australian dollar.

A)rise; appreciation
B)rise; depreciation
C)fall; appreciation
D)fall; depreciation

Question 80

If the Reserve Bank of Australia pursues expansionary monetary policy, ceteris paribus, aggregate demand will:

A)rise by more than it otherwise would have and the price level will rise by more than it otherwise would have.
B)fall by more than it otherwise would have and the price level will fall by more than it otherwise would have.
C)rise by less than it otherwise would have and the price level will rise by less than it otherwise would have.
D)fall by less than it otherwise would have and the price level will rise by less than it otherwise would have.