Economic Principles: RBA's Cash Rate Policy Decision

Running head: ECONOMIC PRINCIPLES 1
Week 10 Assignment
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ECONOMIC PRINCIPLES 2
Question1
The Reserve Bank of Australia (RBA) made the decision on the cash rate policy to
remain unchanged at a rate of 1.5 percent. This decision was due to the reasonable factors in the
economy. The inflation rate in Australia went down due to the fall in prices for oil. Oil being
used in the transport sector, manufacturing and processing of the goods and services that require
energy; the fall in the oil prices lead to low production costs and distribution of the goods and
services to the markets were also relatively cheaper. The labor market remained strong in the
country where more employment opportunities were available and the unemployment rate
remained at 4.9 percent. The shortage of skilled people in the country contributed to the
availability of vacancies in the job market (Bowman, 2010). The labor market being strong, it
contributed to wages growth in the country which leads to development growth in Australia’s
economy. All these factors and considerations in the economic growth made the RBA Board
remain the cash rate policy unchanged since there is a positive impact on the economy as they
have targeted before (RBA, 2019).
The RBA’s policy aims at reducing the rate of the unemployment (full employment), to
maintain the inflation rate low and stable, to increase the number of investors in the country, to
reduce the rate of government borrowing, increase the living standards (Australian people
welfare), and other economic prosperities in the country. All these objectives made the RBA
Board make their decision on the interest rate to remain unchanged due to how the economy is
progressing after reviewing the given data on each of the objective (Cagliarini, Kent & Stevens,
2010).

ECONOMIC PRINCIPLES 3
Question2
The monetary policy decision in terms of real-life implementation means that the Bank’s
Domestic Markets Department has to maintain the money market conditions (Bernanke et al,
2018). This keeps the cash rate almost to the operating target decision made by the Board by
making sure that banks are availed with funds in the money market. The cash rate in the money
market is determined by the interaction of demand and supply of overnight funds. The shift in
the interest rate results from a change in the operating cash rate target. In order to pursue a
successful cash rate target, the Reserve Bank should control over the supply of funds with banks
use to settle transactions among themselves (exchange settlement funds). The Reserve Bank has
to supply exchange settlement funds at a greater rate than that which commercial banks wish to
hold in order to make the cash rate to fall. For the cash rate to fall, then the Reserve Bank has to
supply more than the. This leads the banks to shed funds through lending more in the cash
market. The Reverse Bank have to maintain their duty for lending in balance and the commercial
banks have to remain in strict in giving the Reserve Banks to supply more to them (Smales,
2012).
So, this decision on implementation plays a major role in the monetary policy since it is
the process that determines the behavior in the state of a nation.
Question3
The expected transmission on the decision on the economic outcome is that the labor
market is expected to continue improving leading to lift in the wag growth in the country. The
Australian dollar has remained narrow and the terms of trade in the country are expected to
increase as it is expected to decline gradually over time. Unemployment is an issue which is a