In recent years in response to lower real GDP growth, higher cyclical unemployment and lower inflation the Reserve Bank of Australia lowered the cash rate from 2.75% to 0.10% in 2020.

Required:

1. Explain the intended impact of the RBA’s policy to lower the cash rate on:

- consumption spending;

- investment spending;

- aggregate demand.

2. What is the impact of the RBA’s policy on the value of the Australian dollar (AUD) in the forex market? Explainyour answer.
3. In 2019 Peter Lim deposited $60,000 into a bank account at a fixed interest rate of 5% annually. As a result of RBA policy the inflation rate increases from 1% to 3%. Is Peter ‘better’ or ‘worse’ off as a result? Briefly explain with reference to the real interest rate.

Answer rating: 100% (QA)

Answer 1 The RBAs policy to lower the cash rate is intended to stimulate consumption spending and in... View the full answer