Question 1

The RBA is required to determine its monetary and banking policy so as to:
A) achieve the maintenance of full employment.
B) achieve the stability of the Australian currency.
C) contribute to the economic prosperity and welfare of the people.
D) all of the above.

Accepted Answer

The Reserve Bank of Australia (RBA) has a mandate to achieve all of these objectives: maintaining full employment, ensuring the stability of the Australian currency, and contributing to the economic prosperity and welfare of the people.

Question 2

In the transmission of monetary policy to the economy, a rise in interest rates will result in:
A) lower household saving.
B) lower business investment.
C) higher inflation.
D) rising asset prices.

Accepted Answer

Higher interest rates increase the cost of borrowing, leading to reduced business investment.

Question 3

For policy based on monetary aggregates to be successful, which of the following variables needs to remain fairly constant?
A) V
B) P
C) M
D) Y

Accepted Answer

For a policy based on monetary aggregates to be successful, the velocity of money (V) needs to remain fairly constant. This is because the relationship between money supply (M), velocity (V), price level (P), and output (Y) is given by the equation MV = PY. If V is stable, changes in M can predictably affect P and Y.

Question 4

M3 is equal to:
A) Currency + Cheque deposits.
B) Currency + Cheque deposits + Bank deposits.
C) Currency + Bank deposits.
D) none of the above.

Accepted Answer

The answer of M3 is equal to:
A) Currency + Cheque...

Question 5

Suppose the central bank increases the money supply. Whether inflation increases as a result will depend on:
A) the yield curve.
B) the media reaction.
C) the degree of capacity utilisation in the economy.
D) the level of the exchange rate.

Accepted Answer

The degree of capacity utilisation in the economy affects inflation because if there is spare capacity, an increase in money supply may not lead to inflation as the economy can produce more without increasing prices.

Question 6

Under a fixed exchange rate regime:
A) money supply remains fixed.
B) purchases of foreign currency by the RBA will withdraw cash from the system.
C) the exchange rate is determined by supply and demand.
D) the authorities have little control over their transactions in the foreign exchange market.

Accepted Answer

The answer of Under a fixed exchange rate regime:
A) money...

Question 7

Which of the following is correct?
A) Changes in the cash rate and longer- term rates affect inflation and the real economy through the transmission mechanism.
B) The change in the cash rate will affect longer- term interest rates (the yield curve) in a way that is determined by changes in market interest rate expectations.
C) The RBA carries out market operations so that the money base (balances in ESAs) is consistent with the cash rate the Bank has set.
D) All of the above.

Accepted Answer

All the statements are correct as they describe the mechanisms and operations related to monetary policy and interest rates, including the transmission mechanism, the impact on the yield curve, and the RBA's market operations.

Question 8

The Fisher Effect says that:
A) the supply of funds always outweighs the demand.
B) the inflation rate increases with the real interest rate.
C) the nominal interest rate increases with the rate of inflation.
D) the income effect outweighs the substitution effect.

Accepted Answer

The Fisher Effect states that the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate, implying that the nominal interest rate increases with the rate of inflation.

Question 9

M1 is equal to:
A) Currency + Cheque deposits + Bank deposits.
B) Currency - Cheque deposits.
C) Currency + Cheque deposits.
D) none of the above.

Accepted Answer

M1 is a measure of the money supply that includes physical currency and coin, demand deposits, traveler's checks, and other checkable deposits.

Question 10

Which of the following theories explains the shape of the yield curve?
A) Expectations theory.
B) Segmented market theory.
C) Liquidity or risk premium.
D) All of the above.

Accepted Answer

All three theories—expectations theory, segmented market theory, and liquidity or risk premium—offer explanations for the shape of the yield curve.

Question 11

The set of channels through which changes in monetary policy instruments affect the economy is known as the:
A) regulatory structure.
B) transmission mechanism.
C) velocity of money.
D) money base.

Accepted Answer

The transmission mechanism refers to the channels through which changes in monetary policy instruments, such as interest rates or the money supply, affect the economy.

Question 12

Tobin's q is equal to:
A) S divided by PI.
B) S multiply by PI.
C) PI multiply by S.
D) PI divided by S.

Accepted Answer

Tobin's q is a measure of the market value of a firm's assets relative to its replacement cost. It is calculated as the ratio of the firm's market value of equity (S) to its replacement cost of capital (PI).

Question 13

A normal yield curve is:
A) downward sloping.
B) flat.
C) upward sloping.
D) none of the above.

Accepted Answer

A normal yield curve is upward sloping, indicating that longer-term interest rates are higher than short-term rates, reflecting the risks and expectations of future economic growth.

Question 14

An important assumption in the application of the Mundell- Fleming model of exchange rates is that:
A) the balance of payments is in deficit.
B) the exchange rate is fixed.
C) a small open economy cannot influence overseas interest rates.
D) prices of short- dated bonds are more sensitive to market yields than long- dated bonds.

Accepted Answer

The Mundell-Fleming model assumes a small open economy, meaning it cannot influence global interest rates, which are taken as given.

Question 15

The statement that 'official transactions were undertaken in the domestic money market to offset effects on liquidity of official transactions in the foreign exchange market' most closely describes:
A) immunisation of the RBA's portfolio.
B) modification of the velocity of money.
C) interest rate targeting.
D) sterilisation of foreign exchange operations.

Accepted Answer

Sterilisation of foreign exchange operations involves conducting domestic market transactions to offset the impact of foreign exchange interventions on the money supply, maintaining monetary stability.

Question 16

Who sets the overnight rate in the interbank market (the cash rate) in Australia?
A) RBA.
B) The traders in Sydney.
C) The Finance minister.
D) The commercial banks.

Accepted Answer

The Reserve Bank of Australia (RBA) sets the overnight cash rate target, which influences the interbank market rates.

Question 17

Which of the following policies can be used to prevent the growth of asset price bubbles?
A) Banks and other lenders can be required to adopt conservative loan- to- valuation ratios (LVRs).
B) The use of 'circuit breakers'.
C) The tax regime could be altered to make speculation in assets less attractive.
D) All of the above'

Accepted Answer

All of the mentioned policies can help prevent asset price bubbles by reducing excessive borrowing, providing market stability, and discouraging speculative investments.

Question 18

Which of the following is NOT a means by which the RBA can adjust the amount of cash in the financial system each day?
A) Issuing 'repos'.
B) Altering the velocity of money.
C) Selling government bonds.
D) Buying foreign exchange.

Accepted Answer

Altering the velocity of money is not a means by which the RBA can adjust the amount of cash in the financial system each day.

Question 19

Which of the following best describes the 'real' interest rate?
A) The rate of return on an investment expressed in monetary terms.
B) The rate of return after deducting tax liability.
C) The effective return after taking into account compounding effects.
D) The return on an investment after the effects of inflation are taken into account.

Accepted Answer

The 'real' interest rate is the nominal interest rate adjusted for inflation, reflecting the true purchasing power of the return on an investment.

Question 20

If business investment increases and other factors remain constant, the economy's interest rate will:
A) rise.
B) remain unchanged.
C) fall.
D) It depends on what industry the investment is in.

Accepted Answer

When business investment increases, the demand for funds in the financial markets typically rises, leading to an increase in the interest rate if other factors remain constant.

Quiz 7: Interest Rates, the Yield Curve and Monetary Policy

The RBA is required to determine its monetary and banking policy so as to:

In the transmission of monetary policy to the economy, a rise in interest rates will result in:

For policy based on monetary aggregates to be successful, which of the following variables needs to remain fairly constant?

M3 is equal to:

Suppose the central bank increases the money supply. Whether inflation increases as a result will depend on:

Under a fixed exchange rate regime:

Which of the following is correct?

The Fisher Effect says that:

M1 is equal to:

Which of the following theories explains the shape of the yield curve?

The set of channels through which changes in monetary policy instruments affect the economy is known as the:

Tobin's q is equal to:

A normal yield curve is:

An important assumption in the application of the Mundell- Fleming model of exchange rates is that:

The statement that 'official transactions were undertaken in the domestic money market to offset effects on liquidity of official transactions in the foreign exchange market' most closely describes:

Who sets the overnight rate in the interbank market (the cash rate) in Australia?

Which of the following policies can be used to prevent the growth of asset price bubbles?

Which of the following is NOT a means by which the RBA can adjust the amount of cash in the financial system each day?

Which of the following best describes the 'real' interest rate?

If business investment increases and other factors remain constant, the economy's interest rate will: