Question

If the RBA believes inflation will rise to 7 per cent over the next few months, the likely response will be to:

Select one:

a. sell government securities to banks to decrease interest rates.

b. buy government securities from banks to decrease interest rates.

c. sell government securities to banks to increase interest rates.

d. buy government securities from households to increase interest rates.

Answer 1

Option C.

• If the RBA believes that the inflation will rise to 7 percent over the next few months, then it must use the contractionary monetary policy to decrease the inflation rate.
• We know that the contractionary monetary policy includes the sale of government securities.
• Hence it must sell the securities to the banks in order to decrease the aggregate demand and Increase the interest rates within the economy as we know that money supply decreases when the securities are sold, thereby decreasing the level of inflation within an economy.