Question 2 (Total 14 marks) In Australia, the responsibility of the RBA in relation to monetary policy will best contribute to; (a) the stability of the currency of Australia, (b) the maintenance of full employment in Australia; and (c) the economic prosperity and welfare of the people of Australia. Most of the goals of the RBA are relatively consistent with one another. The goals that have often been perceived to be in conflict are full employment and stable prices, at least in the short run. The main reason that the RBA tries to change the monetary base and, in the short run, interest rates is to affect the level of economic activity in the economy. Monetary policy is thought to affect the economy through three basic expenditure channels: business investment, consumer spending and net exports. Businesses spend on investment in plant, equipment, new buildings and inventory accumulation. Consumer spending is typically divided into two categories: first, durable goods such as automobiles, boats, appliances and electronic equipment; and second, housing, which tends to be very sensitive to interest rates. Net exports are the difference between goods and services exported into the country and those imported. Clearly, exports and imports are sensitive to the exchanges rate between the AUD and the currencies of foreign countries. Apart from these three goals of monetary policy, the RBA has other responsibilities. Through the Payments System Board, it has responsibility for the stability of the financial system and has several roles in the payments system. It operates the real-time gross settlement system for high-value payments, it provides banking and payment services to government clients, and it oversees and regulates the payments system. The Payments System Board of the Reserve Bank has a mandate to promote efficiency and competition in the Australian payment systems, as well as stability of the system. As payment systems get larger, the benefits increase disproportionally. The more merchants that take cards, for example, the more benefit there is to hold a card. The more people that hold cards, the more benefit there is to merchants accepting cards. This payments system involves people working together. In order to get the positive benefits from networks, there needs to be a commonality of interest among participants that are often competitors. Collaboration is necessary to improve payment systems in Australia. A very good example of industry collaboration in recent years has been the development and then the implementation of the New Payments Platform, or the NPP. The NPP is an infrastructure that allows instant payments to be made and received 24/7, with richer information and simpler addressing. Its genesis was the Payments System Board's Strategic Review of Innovation in the payments system. (a) The goals that have often been perceived to be in conflict are full employment and stable prices. Provide your argument on this statement. (4 marks)