Explain the meaning of central bank independence. (1 mark) 2. Discuss the relationship between central bank independence and inflation targeting. (2 marks) LEARNING OBJECTIVE 2: EXPLAIN THE FUNCTIONS OF THE EXCHANGE SETTLEMENT ACCOUNTS. 3. Explain the reason (or the ultimate purpose) the commercial banks are legally mandated to hold funds in exchange settlement accounts with the RBA. (2 marks) 4. Commercial banks are required by law use their exchange settlement accounts to make three types of payments. List these three types of payments. (3 marks) LEARNING OBJECTIVE 3: EXPLAIN THE FRAMEWORK IN AUSTRALIA TO SET THE POLICY INTEREST (CASH) RATE. 5. Australia’s CPI inflation rate last quarter was only 1.3% which was below the RBA’s inflation target. There was some speculation that the RBA would cut the cash rate from 2% to 1.75%. a) Outline the actions of the RBA if it were to lower the cash rate from 2% to 1.75%. (2 marks) b) Illustrate this cut on the diagram below. (1 mark) LEARNING OBJECTIVE 5: UNDERSTAND THE EFFECTIVENESS OF MONETARY POLICY ON GDP & INFLATION, DEPENDS ON THE STRENGTH OF THE MONETARY POLICY TRANSMISSION CHANNELS. 6. Briefly discuss the meaning of an effective monetary policy. (1 mark) 7. Outline one monetary policy transmission mechanisms for a cut in the policy interest rate. In other words, discuss how a decrease in the policy interest rate may increase inflation (or counter deflation) and increase GDP. (1 mark) LEARNING OBJECTIVE 6: EXPLAIN THE DIFFERENCE & IMPLICATIONS OF NOMINAL & REAL INTEREST RATES AND LEARNING OBJECTIVE 7: RECOGNIZE THAT TRADITIONAL MONETARY POLICY IS LIMITED BECAUSE THE POLICY (NOMINAL) INTEREST RATE CANNOT BE LESS THAN ZERO. 8. Assume the following situation where the economy is experiencing deflation rate of 2% and the central bank has reached the traditional monetary policy limit where the policy interest rate is zero. Answer the following questions. a) Calculate the real interest. (1 mark) b) Discuss the problem this situation creates for a central bank trying to stimulate economic activity (2 marks) LEARNING OBJECTIVE 8: EXPLAIN THE CAUSES OF ASSET BUBBLES & THEIR IMPLICATIONS FOR THE BROADER ECONOMY. 9. Answer the following questions about the Sydney housing market. a) Outline the fundamental problem difficulty in determining if the Sydney housing market is experiencing a bubble. (1 mark) b) The home mortgage rate interest rate is around 4.32%. The CPI inflation rate is 1.3%. Calculate the real interest rate on home loans in Australia. Assess the influence this would have on creating any property bubble. (1 mark) c) Evaluate whether the housing market in Sydney satisfies the characteristics of an asset bubble as outlined by Shiller. Robert Shiller won the Nobel Prize in Economics. He argues that asset bubbles are caused by irrational crowd behaviour. He proposes a mental health checklist to check for asset bubbles. Diagnose the mental health of people and Sydney property market? (2 marks) Mental Health Checklist Sydney Property Market Diagnostic Checklist Yes No Rapidly Increasing Prices People tell each other stories that purport to justify the bubble (Belief that prices will continue to increase People feel envy & regret having not participated Constant stories in the news media
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