Finish this sentence: When the RBA decides to decrease the cash rate,

Question

BlackTom AI · Accepted Answer

Lowering the cash rate reduces market interest rates, so borrowing becomes cheaper and saving less attractive — this raises spending and investment, shifting aggregate demand rightward.

1) Relevant knowledge points and concepts
- Cash rate: the central bank’s policy interest rate that influences short-term market rates.  
- Transmission mechanism: lower policy rates → lower lending and borrowing costs → higher consumption and investment → higher aggregate demand (AD).  
- Short-run macro effects: rightward AD shift increases real GDP (growth), reduces unemployment (Okun’s relationship), and puts upward pressure on the price level (inflation).  
- Long-run: monetary policy affects prices more than potential output.

2) Step-by-step reasoning
- RBA decreases cash rate.  
- Banks face lower wholesale funding costs and pass on lower interest rates to households and firms.  
- Cheaper loans and lower mortgage repayments increase disposable income and consumption; lower cost of capital encourages business investment.  
- Higher AD increases output and employment as firms expand to meet demand.  
- Higher demand relative to supply tends to raise the general price level.

3) Calculations / intermediate steps
(No numerical calculation required.) Conceptual sequence: ↓ cash rate → ↓ interest rates → ↑ C and I → AD shifts right → ↑ real GDP, ↑ employment, ↑ price level.

4) Why the correct answer is correct
Option (a) exactly describes this standard monetary policy outcome: aggregate demand increases, leading to higher growth, higher employment and higher prices (inflationary pressure) in the short run.

5) Why the other options are incorrect
- (b) is wrong: lowering the cash rate does not decrease AD.  
- (c) is wrong: an increase in AD would not lead to lower growth or higher unemployment.  
- (d) is wrong: while growth and unemployment move in the stated directions, prices would rise, not fall, when AD increases.

6) Conclusion
Therefore the correct option is (a): Aggregate demand increases, leading to higher growth, employment and prices.

Finish this sentence: When the RBA decides to decrease the cash rate,单项选择题

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