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

Question

BlackTom AI · Accepted Answer

Increasing the cash rate is a contractionary monetary policy: it raises interest rates and makes borrowing more expensive, which reduces demand across the economy.

1) Relevant concepts: aggregate demand (AD) equals C + I + G + (X − M). Monetary policy affects consumption (C), investment (I) and net exports (X − M) via the cash rate. Higher interest rates raise the cost of loans, increase returns to saving, and tend to appreciate the exchange rate.

2) Step-by-step reasoning:
- The RBA raises the cash rate → market interest rates (mortgage, business loans, consumer credit) rise.
- Higher interest rates reduce household consumption (less spending and more saving) and lower residential and consumer borrowing.
- Higher rates make capital spending less attractive → business investment (I) falls.
- A higher domestic interest rate often attracts foreign capital, appreciating the exchange rate → exports become more expensive and imports cheaper → net exports (X − M) fall.
- Government spending (G) is largely unaffected by the cash rate in the short run, so overall AD falls because C, I and (X − M) decline.

3) Calculations/intermediate steps: Using AD = C + I + G + (X − M), if C, I and (X − M) decrease, the sum (AD) decreases. No numerical calculation is required for this conceptual question.

4) Why the correct answer is correct: A decrease in AD reduces pressure on the general price level (inflation), so increasing the cash rate leads to downward pressure on prices. This matches option (a).

5) Why the other options are incorrect:
- (b) contradicts basic transmission: if AD decreases you would not get higher growth, employment and prices—those would fall, not rise.
- (c) and (d) assert AD increases after a rate hike; that is the opposite of the standard effect of a higher cash rate.

Conclusion: Therefore increasing the cash rate reduces aggregate demand and exerts downward pressure on the price level, confirming answer (a).

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

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