Monetary policy affects:

inflation only.

output only.

both inflation and output.

neither inflation or output.

2.

If the RBA decides to use monetary policy to influence the economy, what will it change?

The tax rate

The government expenditure

The exchange rate

The money supply

3.

Change in which of the following would NOT shift the Phillips curve (aka the aggregate supply curve)?

1

Supply shock

Natural output level

Expected inflation

Output level

4.

Suppose that the inflation rate is currently equal to its target and output is at its potential level. If the economy is hit by a demand shock that raises inflation and output, the Reserve Bank can conduct a contractionary monetary policy.

As a result of conducting contractionary monetary policy, what is stabilised in this situation?

Inflation only, meaning output is further away from its potential level

Output only, meaning inflation is further away from its target

Both inflation and output

5.

According to interest rate parity, if the domestic and foreign interest rates are 12% and 10% respectively, foreign currency is expected to:

appreciate by 4%.

depreciate by 4%.

appreciate by 2%.

depreciate by 2%.

6.

Fill in the blank:

If the RBA wanted to stimulate the economy, it could lower the target cash rate through open-market operations by _______________ the supply of loanable funds in the overnight lending market.

increasing

decreasing

7.

According to the AS/AD framework with an upward sloping AS curve and a vertical AD curve, a positive demand shock would result in which of the following results?

Higher output level

Lower output level

Higher inflation rate

Lower inflation rate

8.

What will happen if the Australian dollardepreciatesin the foreign exchange market?

Foreigners will find Australian goods less expensive.

Foreigners will find Australian goods more expensive.

The Australian dollar will buy more in the foreign goods market.

Imported goods will cost Australians less.

9.

Fill in the blank:

To stabilise inflation, the Reserve Bank should conduct an expansionary monetary policy when the current inflation rate is ______________ the target rate.

below

above

equal to

10.

An increase in the Reserve Bank's cash rate target is equivalent to:

a contractionary monetary policy.

an increase in money supply.

a monetary policy easing.

11.

An increase in oil prices, such as the oil shocks in the 1970's, would lead to:

a downward shift in the AS curve.

a movement down along the AS curve.

an upward shift in the AS curve.

a movement up along the AS curve.

12.

12

According to the extended AS/AD framework, an expansionary monetary policy shifts the AD curve rightward. This policy would lead to output expansion and exchange rate depreciation.

In this situation, inflation would go:

higher.

lower.

13.

Consider the above AS-AD diagram representing an economy. The equilibrium is currently at point A where inflation is below the target inflation, piebar, and output is equal to its potential or natural level of output, ybar.

Suppose the Reserve Bank always wants to stabilise inflation around its target and stablise output around its potential, if possible. What can they feasibly do in this scenario?

Conduct an expansionary monetary policy and achieve both objectives

Conduct a contractionary monetary policy and achieve both objectives

Choose to only stabilise either output or inflation as the Reserve Bank is facing a trade off

Choose to sit tight, do nothing and hope the market corrects itself

14.

According to interest rate parity, if there is an increase in the foreign interest rate, there will be an upward shift in the IP curve.

This implies that for any given value of the domestic interest rate and a given expected exchange rate, the exchange rate is:

lower.

higher.

15.

The IS curve depicts the relationship between output and what other factor?

Interest rate

Inflation

Natural output level

Unemployment level

Honor Code Agreement