Question 4

Concerned for the current state of the Australian economy, the Reserve Bank of Australia (RBA) has decided to reduce interest rates. Describe the mechanism that the RBA will undertake to achieve this outcome. (2.5 Marks)

Explain how this reduced interest rate will transmit through the economy. (2.5 Marks)

What do you think would be the impact on the economy of this policy if the velocity component of the quantity theory of money equation M*V=P*Q was much slower than anticipated? (2 Marks)

What would be the likely affect if the RBA misjudged the state of the economy and it was closer to full employment than anticipated? A diagram would assist your answer here and attract more marks. (3 Marks or 1 Mark without a diagram)