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Q4 - Monetary Policy Response to the Recent Negative Shock Expansionary monetary policy has been widely used as a tool by the central Banks around

Q4 - Monetary Policy Response to the Recent Negative Shock

Expansionary monetary policy has been widely used as a tool by the central Banks around the world in response to the global pandemic led by COVID-19 in 2020-21. However, the RBA has recently announced an increase in the cash rate from 0.1% to 0.35% (May 2022) for the first time in last so many years to address the rising inflation. While this type of move is considered necessary to address the rising inflation, there is an argument that RBA needs to 'go easy' on interest rate hikes as shown in one of the articles below.

https://www.rba.gov.au/media-releases/2022/mr-22-12.html

https://theconversation.com/why-the-rba-should-go-easy-on-interest-rate-hikes-inflation-may-already-be-retreating-and-going-too-hard-risks-a-recession-182273

https://theconversation.com/central-banks-hunt-in-packs-heres-why-ours-ought-to-be-wary-about-lifting-the-cash-rate-181465

Explain how the transmission mechanism of monetary policy works when RBA takes decisions of increasing the interest rates as stated above? What could be the possible implications for economy if RBA continues with such rate rise in the coming months? Consider the impacts on factors such as consumption, investment, economic growth, unemployment and inflation in your answer.

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