Question 3. Consider the Australian economy. a/ If the cash rate is currently 1%pa and the RBA expansionary policy is going to move it by 25 basis points. What cashrate corridor will the RBA likely construct? Explain your working and answer in words. (6 marks)

b/ a forex swap is used by the RBA to target a 0.75%pa cashrate with a spot purchase of AUD/USD and forward sale of AUD/USD in 1 year. If the spot price is 0.6251 then what is the forward price? Explain your working and answer in words. (3 marks)

c/ What are the potential problems of Australia having reduced its USD currency reserve holdings since 2008? (3 marks)

d/ Explain how Quantitative Easing (QE) can risk inflation. (3 marks)