Money and Monetary Policy – Exchange Rate Pass Questions

1. What is the main monetary policy tool used by the Reserve Bank of Australia (RBA) and

why?

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2. Briefly discuss the effect of a fall in the cash rate on consumption.

3. Suppose the following table illustrates the values of real and potential GDP and the price

level, if the Reserve Bank of Australia (RBA) does not change its current policy to be more

contractionary or expansionary. Suppose that the RBA uses an appropriate policy and is

successful in keeping real GDP at its potential level in 2014.

Year Potential GDP Real GDP Price level

2013 $1.44 trillion $1.44 trillion 144

2014 $1.47 trillion $1.45 trillion 146

State whether each of the following will be higher or lower than if the RBA had taken no

action:

3a.  Real GDP

3b.  Potential GDP

3c.  The price level

3d.  The unemployment rate

4. How does monetary policy affect the share market?

5. Suppose that Australia’s price level is 125, the British price level is 100, and the nominal

exchange rate of pounds to the dollar is £0.60 = $1. Calculate the real exchange rate of

pounds to the dollar. Show all workings.