Question
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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started