Question 1:

The Reserve Bank of Australia (RBA) has stated that: The principal medium-term objective of monetary policy is to control inflation, so an inflation target is thus the centerpiece of the monetary policy framework.i Explain why the RBA is targeting inflation in Australia.

Question 2: In the aftermath of the global financial crisis, the Australian government gave cash hand-outs of up to $900 to most taxpayers, as part of a policy aimed to stimulate economic growth. What impact would this have had on the cash rate if there were no intervention on the overnight money market by the RBA? Briefly explain.

Question 3: True or false? If false, explain why.

i. The Reserve Bank of Australia engages in open market operations only when it wants to change interest rates.

ii. Increases in the price level increase the quantity of money needed for buying and selling.

iii. A rise in the rate of real interest rate will lead to a movement downward along the money demand curve.

iv. The main goal of monetary policy in Australia is full employment of the labour force.

v. If the Reserve Bank of Australia buys financial instruments in the open market, net exports are likely to decrease.