When the RBA is trying to control rising inflation, it:

Question

BlackTom AI · Accepted Answer

Contractionary monetary policy reduces the money supply and raises interest rates, so the RBA sells bonds to remove cash from the economy.

1. Relevant knowledge points and concepts
- Open market operations: central banks buy or sell government bonds to influence the quantity of money.
- When a central bank sells bonds, the public pays cash to the central bank, which withdraws that cash from circulation, reducing bank reserves and the overall money supply.
- A reduced money supply tends to raise interest rates, discouraging borrowing and spending, which lowers aggregate demand and helps curb inflation.

2. Step-by-step reasoning
Step 1: The RBA wants to reduce inflation, so it implements contractionary policy. 
Step 2: It sells government bonds in open market operations. 
Step 3: Buyers of those bonds transfer funds (cash or bank reserves) to the RBA in exchange for the bonds. 
Step 4: Those funds are effectively taken out of circulation (the RBA holds them), so commercial banks have fewer reserves. 
Step 5: With fewer reserves, banks lend less or must pay higher rates to obtain funds, so market interest rates rise. 
Step 6: Higher interest rates reduce consumer spending and business investment, lowering aggregate demand and easing inflationary pressure.

3. Intermediate mechanism (no numeric calculation required)
- Bond sale → public pays cash → central bank balance sheet expands on asset side (bonds) and liabilities decrease (currency/reserves) → money supply falls.

4. Why the correct answer is correct
Selling large amounts of bonds is the standard tool to decrease the money supply. This action directly removes liquidity from the banking system, raising interest rates and cooling demand-driven inflation.

5. Why the other options are incorrect
- "Buys large amounts of bonds to decrease the money supply": Buying bonds injects cash into the economy, increasing the money supply (opposite effect).
- "Sells large amounts of bonds to increase the money supply": Selling bonds removes cash, so it decreases, not increases, the money supply.
- "Buys large amounts of bonds to increase the money supply": Buying does increase the money supply and is expansionary, which would raise inflation, not control rising inflation.

6. Conclusion
Therefore, to control rising inflation the RBA sells large amounts of bonds to decrease the money supply, which matches the provided answer.

When the RBA is trying to control rising inflation, it:单项选择题

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