Question

Table 6.1: Output Growth and Inflation Forecasts(a) Per cent Dec 2017 Jun 2018 Dec 2019 un 2019 Dec 2019 un 2020 GDP growth 2% 5.5 1.9 1% 3% 5% 24 1% 2% 3% 5% 5% 5% 5% CP1 inflation 2% Underlying inflation 1% 2017 2017/18 2018 2018/19 2019 2019/20 GDP growth 3% 3% 3% (a) Technical assumptions include A$ at US$0.78, TWI at 64, Brent crude oil price at US$64 per barrel; shaded regions are historical data (b) Average rate in the quarter Sources: ABS; RBA Consider the forecasts for GDP growth and CPl inflation over 2018 and compare this to average over the last 25 years of 3.3% GDP growth and 2.6% CPI growth. With this in mind, is the central bank likely to use expansionary or contractionary policy over 2018? Explain. (3 marks) In which case, should it raise or lower its target interest rate? Explain. (2 marks) If all banks in this economy have a reserve ratio of 6%, explain whether the central bank should buy or sell a bond to achieve the outcome in part b and state how much the quantity of money supplied will change overall as a result of buying or selling a bond with value $100,000. (3 marks) Suppose you and your best friend decide to set establish your own currency Outline two challenges you are likely to face in generating widespread use of your currency. (2 marks) a) b) C) d)