This practice task mirrors Task 7 in the course assessment outline: an extended-response question on monetary policy. Write a sustained, structured, evaluative response. Recommended time: 40 minutes (20 marks).
Question (20 marks)
Explain how a change in the cash rate is transmitted to the level of economic activity, and evaluate the strengths and weaknesses of monetary policy as a tool for managing aggregate demand in Australia.
Your response
Plan (verb, paragraph points, diagram, judgement):
Response:
Marking guide (teacher)
- Cash rate & objective: the RBA targets the overnight cash rate to pursue its objectives (2–3% inflation, full employment, welfare).
- Transmission mechanism: a cut flows through lending rates (cheaper borrowing → C and I up), the exchange rate (depreciation → net exports up), asset prices/wealth (→ C up) and household cash flow (→ C up); together these raise aggregate demand.
- AD/AS link: the stance shifts AD; an easing shifts AD right (output up), a tightening shifts AD left (eases inflation).
- Strengths: set independently of the political cycle; implemented quickly and adjusted frequently; effective economy-wide.
- Weaknesses: long and variable lag (often a year+); a blunt, economy-wide instrument that can't target regions/sectors; loses traction near the zero lower bound (hence unconventional policy).
- Judgement: a supported overall assessment — e.g. effective and nimble for fine-tuning demand but limited in deep downturns where fiscal policy is needed. Reward a clear, evidence-based conclusion.
- Diagram: the transmission-mechanism flow or an AD/AS shift, referenced in the prose.