Hubbard Chapter 12 Answers.pdf - CHAPTER 12 Monetary Policy...

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1 CHAPTER 12 Monetary Policy 12.1 What is Monetary Policy? Learning Objective: Define monetary policy and describe the main goals of monetary policy in Australia. Review Questions 1.1 What are the main goals of monetary policy, as outlined in the Reserve Bank Act 1959 ? The three main goals of monetary policy as stated by The Reserve Bank Act 1959 are to achieve full employment in the labour force, ensure stability of the Australian currency, and to achieve economic prosperity and welfare for the people of Australia. 1.2 What is inflation targeting? How does inflation targeting help to achieve the main goals of monetary policy? Inflation targeting refers to conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation. In Australia, the RBA aims to keep the rate of inflation between 2 per cent and 3 per cent on average over the business cycle. Establishing an inflation rate target strengthens the commitment of the RBA to price stability. Central banks can come under political pressure to engage in expansionary monetary policy in order to increase real GDP and employment in the short run, even though the result of the policy may also be an increase in inflation. An explicit target for inflation may help the RBA to resist this political pressure. Maintaining a low and stable rate of inflation can assist in establishing a sound basis for economic growth in the long run. A low and stable rate of inflation can help to provide an economic environment that is supportive of economic growth, and therefore low rates of unemployment and economic wellbeing and prosperity. In fact, both the Reserve Bank and the government agree on the importance of low inflation. Low inflation assists business and households in making sound investment decisions. Moreover, low inflation underpins the creation of jobs, protects the savings of Australians and preserves the value of the currency. Problems and Applications 1.3 Why is price stability usually the RBA’s main monetary policy goal? What problems can high inflation rates cause for the economy? Price stability (a stable and moderate inflation rate) is the RBA’s main monetary policy goal because rapidly fluctuating and/or increasing/decreasing prices can affect important macroeconomic variables such as consumption, investment, net exports and therefore economic growth and employment. Thus, targeting inflation allows the RBA to achieve its stated goals as outlined in The Reserve Bank Act 1959 . High rates of inflation can reduce the real incomes of people on fixed incomes, lead to unintended income redistribution and increase menu costs.
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2 12.2 The Demand for and Supply of Money Learning Objective: Describe how the Reserve Bank of Australia affects interest rates.
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