ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the RBA increases the cash rate and buys government securities and issues them at a low cash rate
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The government increases the interest rate to stop business and consumers spending and investing
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imports are reduced to help make domestic forms more competitive and so they don’t need to increase their prices
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The RBA increases the cash rate, sells gov securities to reduce the money supply and ensure inflation stays between 2-3%
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Detailed explanation-1: -For example, a central bank might increase interest rates to counter demand-pull inflation, leading consumers to spend less on housing and products. This in turn lowers demand, allowing producers to catch up with supply and restoring balance. Governments can also reduce government spending or raise taxes.
Detailed explanation-2: -Note that the goal of contractionary monetary policy is to decrease the rate of demand for goods and services, not to stop it. So, higher interest rates through contractionary policy can be used to dampen inflation and move the economy back to the price stability component of the dual mandate.
Detailed explanation-3: -Demand-side policies may be expansionary or contractionary. Expansionary policies are intended to stimulate spending in a recessionary economy; contractionary policies designed to reduce expenditures in an inflationary economy.
Detailed explanation-4: -What Is a Contractionary Policy? A contractionary policy is a monetary measure to reduce government spending or the rate of monetary expansion by a central bank. It is a macroeconomic tool used to combat rising inflation.