Q4 - Module L8. Monetary Policy Response to the Recent Negative Shock

[Suggested word count for Q4: 400 to 500 words]

Expansionary monetary policy has been widely used as a tool by the central Banks around the world in response to the global pandemic led by COVID-19 in 2020-21. However, the RBA has recently announced an increase in the cash rate from 0.1% to 0.35% (May 2022) for the first time in last so many years to address the rising inflation.

Explain how the transmission mechanism of monetary policy works when RBA takes decisions of increasing the interest rates as stated above? What could be the possible implications for economy if RBA continues with such rate rise in the coming months? Consider the impacts on factors such as consumption, investment, economic growth, unemployment and inflation in your answer.