Question

If the RBA wants to expand output, it could:

Select one:

a. Lower the cash rate and sell securities through quantitative easing

b. Lower the cash rate and buy securities through quantitative easing

c. Raise the cash rate and buy securities through quantitative easing

d. Raise the cash rate and sell securities through quantitative easing

Answer 1

First we see how interest rate can help to expand output.

If the RBA lower the interest rate then money supply increases and commercial bank has more money to give the loan at the lower interest rate.If the loan interest rate is lower then investor attract for the loan and so investment increases and as the investment increases then employment increases and if the employment increases then people purchasing power increases and so aggregate demand increases and so production increases and so output increases.

Now we see if RBA buy securities.

If RBA byu securities then in return give money and so money supply increases and if money supply increases then purchasing power increases and so demand is created and if demand is created then production will increase and so output increases .

Hence from the above theory we can conclude that option B is the correct statement.