ACT SSC Economics — Unit 4
Monetary Policy — Flashcards & Quiz
Monetary policy is the RBA's use of the cash rate to influence inflation, unemployment and growth. For ACT SSC Economics Unit 4 you need to describe the RBA's 2-3% inflation target, explain the transmission mechanism from cash rate to aggregate demand, and evaluate monetary policy against its trade-offs and lags. Anchor your discussion in recent RBA decisions and CPI outcomes.
Sample Flashcards
Q1: What are the objectives of the RBA’s monetary policy?
The RBA has three objectives: 1) Stability of the Australian currency (low inflation of 2–3%). 2) Maintenance of full employment. 3) Economic prosperity and welfare of the Australian people. These are set out in the Reserve Bank Act 1959.
Q2: Explain the transmission mechanism of monetary policy.
The RBA adjusts the cash rate → commercial banks adjust lending/deposit rates → this affects borrowing and saving decisions → which changes consumption (C) and investment (I) → shifting aggregate demand → influencing economic growth, employment and inflation.
Q3: What are the limitations of monetary policy?
Limitations include: time lags (12–18 months for full effect), blunt instrument (affects all sectors equally), ineffective at near-zero rates (liquidity trap), cannot address supply-side issues (cost-push inflation), and the exchange rate channel can harm exporters.
Sample Quiz Questions
Q1: The RBA targets an inflation rate of 5–7% on average over the business cycle.
Answer: FALSE
The RBA targets 2–3% inflation on average, not 5–7%.
Q2: The RBA’s objectives include stability of the currency, full employment and economic welfare.
Answer: TRUE
These three objectives are set out in the Reserve Bank Act 1959.
Q3: Monetary policy takes effect immediately with no time lags.
Answer: FALSE
Monetary policy has significant time lags of 12–18 months for the full effect to flow through the economy.
Last updated: March 2026 · 3 flashcards · 4 quiz questions