Question
1. The impact of an increase in the cash rate on aggregate demand, aggregate supply and economic growth in Australia is likely to be negative
1. The impact of an increase in the cash rate on aggregate demand, aggregate supply and economic growth in Australia is likely to be negative in the short run as higher interest rates lead to higher borrowing costs and decreased consumer and business confidence. In the long run, higher interest rates may lead to increased saving and investment and increased economic growth.
2. The increased inflation is likely to lead to a decrease in the balance of trade as higher prices lead to decreased demand for Australian exports. The flow of capital is likely to be negative in the short run as higher interest rates lead to decreased investment in Australia. The monetary policy should be used to bring the Australian economy back on track by decreasing the cash rate to stimulate aggregate demand and economic growth.
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