In which of the following situations would the Reserve Bank of Australia (RBA) conduct contractionary monetary policy? a. The RBA fears that unemployment is climbing above the natural rate of unemployment. b. The RBA is concerned that aggregate demand would continue to exceed the growth in potential GDP. c. The RBA is worried that deflation will become a problem. d. The RBA believes that aggregate demand was growing too slowly to keep up with potential GDP.
Question
In which of the following situations would the Reserve Bank of Australia (RBA) conduct contractionary monetary policy?
a. The RBA fears that unemployment is climbing above the natural rate of unemployment.
b. The RBA is concerned that aggregate demand would continue to exceed the growth in potential GDP.
c. The RBA is worried that deflation will become a problem.
d. The RBA believes that aggregate demand was growing too slowly to keep up with potential GDP.
Solution
The correct answer is:
b. The RBA is concerned that aggregate demand would continue to exceed the growth in potential GDP.
Contractionary monetary policy is used when the economy is overheating, i.e., when aggregate demand is growing too fast compared to the economy's potential to produce goods and services (potential GDP). This can lead to inflation, as too much demand chases too few goods. By implementing contractionary measures such as raising interest rates or reducing the money supply, the RBA can slow down the economy, reduce aggregate demand, and prevent inflation. The other options (a, c, and d) describe situations where the RBA would likely implement expansionary, not contractionary, monetary policy to stimulate the economy.
Similar Questions
The Federal Reserve would most likely adopt a contractionary monetary policy in which economic situation?A.The country has a high unemployment rate and slow economic growth.B.The country has a low inflation rate and weak economic growth.C.The country has a high inflation rate and rapid economic growth.D.The country has a low unemployment rate and steady economic growth.
The implementation of a contractionary policy by the Federal Reserve would result in:Question 3Answera.increased spendingb.increased economic growthc.lower interest ratesd.lower unemploymente.lower inflation
Contractionary monetary policy:Question 33Select one:a.deals with reduced government spending and/or increased taxes.b.results in increased domestic farm prices, export prices, and input prices.c.deals with increasing government spending and/or decreasing tax rates.d.deals with increasing money supply in the economy and/or decreasing interest rates.e.deals with decreasing money supply in the economy and/or increasing interest rates.
If the Reserve Bank of Australia lowers its target for the cash rate, this indicates that it is: a. pursuing a contractionary monetary policy. b. attempting to combat inflation. c. pursuing an expansionary monetary policy. d. concerned that the growth in aggregate demand will exceed potential GDP.
In the AD-AS model, what happens if the central bank implements a contractionary monetary policy?A.The aggregate demand curve shifts to the right, inflation increases.B.The aggregate demand curve shifts to the left, inflation decreases.C.The aggregate supply curve shifts to the right, inflation decreases.D.The aggregate supply curve shifts to the left, inflation increases.
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