10 CommerceRBA Worksheet –Our Economy
Go to the Reserve Bank website and answer the following questions ( )
1)What is the current inflation rate?
a)3.6%
2)What has the government and the RBA agreed it should range between?
a)2-3%
3)Why did they choose that particular range?
a)The target of2–3 per centadopted by the Bank reflects an overall assessment of factors such as tax, uncertainty and distributional (i.e wealth from those who own monetary assets to those who owe money) effects, which seems both achievable and broadly in line with international practice.
4)Copy the table “Table 1: Inflation”
5)What do you notice about Australia’s rate compared to others?
a)We are pretty much in the middle compared to economies with whom we work
6)What is monetary policy?
a)Involves the management of short-term interest rates to achieve domestic policy objectives. Countries following this approach include Australia, the United States, Japan and New Zealand
b)It sets out three objectives:
i)the stability of the currency of Australia;
ii)maintenance of full employment in Australia; and
iii)the economic prosperity and welfare of the people of Australia.
7)How/when is it decided?
a)The Board normally meets eleven times each year, on the first Tuesday of the month except in January
8)What is the government’s relationship with the RBA?
a)The formulation of monetary policy is the primary responsibility of the Reserve Bank Board.
b)The Reserve Bank Board makes decisions about interest rates independently of the political process – that is, it does not accept instruction from the Government of the day on interest rates
c)The relationship of the RBA with the Government is one of independence with consultation
9)What is the cash rate?
a)The cash rate is the rate charged on overnight loans between financial intermediaries. It has a powerful influence on other interest rates and forms the base on which the structure of interest rates in the economy is built
10)Who uses the cash rate and what for?
a)the cash rate is kept as close as possible to the target set by the Board, and is used in the managing of the supply of funds available to banks in the money market.
11)Monetary policy affects the economy in 6 ways.Match the correct explanations to the terms:
a)Saving and investment / Higher interest rates increase the cost of borrowing to finance expenditure. They increase the incentive to save, or to delay spending, and they reduce the net (after-interest) returns to investmentb)Money and credit / The standard description of this mechanism is that a tightening of monetary policy makes it more difficult for borrowers to obtain loans, and thereby directly constrains their spending
c)Exchange rate / First, they directly affect the price level. For example, if it is depreciated it makes imported goods more expensive, and, since imported goods make up a significant proportion of domestic spending, this will have an effect on the average price of goods purchased. Secondly,by making imports more expensive and exports cheaper, it will tend to increase demand both for domestic import-competing goods and for exports. This would represent an expansionary impact on the economy
d)Cashflow / It refers the amount of cash available for spending. Those households who have debt will notice that their interest payments are a much higher proportion of their own incomes, the net effect of a rise in interest rates is likely to be to reduce total household spending and, by the same reasoning, a fall in rates will increase total household spending
e)Asset prices / Higher interest rates increase the cost of borrowing to finance expenditure. These changes can affect asset values, which in turn affect people’s wealth and therefore their spending decisions. E.g. they may affect: houses, property investments, shares or other financial investment. A fall in asset prices, in turn, could dampen spending by reducing wealth, and also by reducing borrowing capacity as the assets concerned could have been used as collateral for further loans
f)Inflation / Upbeat demand with the economy means that producers can widen their margins, which also means that a strong demand for labour tends to give employees more power to bargain for higher wages. Price increases encourage demands for higher wages, while wage increases add to costs, which in turn are often passed on in higher prices. This relationshipcan cause inflationary pressures to start to develop
Inflation is:
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
12)Go to - using the following data calculate how much a basket of groceries would cost
a)Basket of goods value: $50
b)Year: the year you were born
c)End year: 2010
i)What is the:
(1)Cost in 2010?$
(2)Total change in cost?%
(3)Over how many years?Years
(4)What is the average annual inflation rate %
13)Go to What country had the highest monthly inflation rate in history?
14)What was it?
15)Now try out the game – Fling Your teacher – link is on