Question

provide reasons for the RBA’s move to cut cash rate. Do you agree or disagree with the adopted expansionary monetary policy?

Answer 1

The recent RBA move involves a cut in the cash rate. This is expansionary monetary policy followed by the Central bank aimed at increasing the level of money supply in the economy.

Yes, we agree with the adopted expansionary monetary policy of the Central bank as the economy is currently in recessionary gap because the move involves increase in the level of money supply in the economy by decreasing the amount of reserves that banks have to keep in the Central bank. This increases money supply and reduces rate of interest in the money market. As the rate of interest in the money market is decreased, the level of investment will increase because cost of investment has decreased. Increase in investment expenditure will increase the level of aggregate demand in the economy and eliminate recessionary gap in the economy.

Thus, th policy will help in increasing aggregate demand which increases Real GDP and helps in elimination of recessionary gap in the economy.