Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n n* and u = un. Given this information, we would expect that the RBA will:
A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a revaluation.
E) More information is needed to answer this question.

Question

Assume that the RBA sets monetary policy according to the Taylor rule. Suppose current Australian macroeconomic conditions are represented by the following: n > n* and u = un. Given this information, we would expect that the RBA will:
A) maintain its current stance of monetary policy.
B) implement a monetary expansion.
C) implement a monetary contraction.
D) implement a monetary contraction with a revaluation.
E) More information is needed to answer this question.

Quizplus · Accepted Answer

The Taylor rule suggests that if the actual inflation rate (n) is above the target inflation rate (n*), the central bank (in this case, the RBA) should implement a monetary contraction to cool down the economy and bring inflation back to its target. The condition that unemployment (u) is equal to the natural rate of unemployment (un) does not change this recommendation.

Assume That the RBA Sets Monetary Policy According to the Taylor