KK8 - Strengths, Weaknesses of MP

Question 1

Strengths - Effective at restraining AD in boom

Answer 1

Tightening policy will reduce discretionary income of indebt households, reduce inflationary pressures

Question 2

Strengths - RBA is fairly independent from government

Answer 2

-Can reduce unpopular political or voter fallout of interest rate rises

Question 3

Strengths - Flexible

Answer 3

-MP is changed very month
-Cash rate target can be implemented quickly (theoretically)

Question 4

Strengths - Unconventional measures

Answer 4

-RBA also has the power to introduce unconventional measures (e.g., 0.1 target cash rate in COVID)

Question 5

Weaknesses - Can be imprecise and blunt in economic impact

Answer 5

-MP can’t specifically target specific areas of concern

Question 6

Weaknesses - RBA does not have direct control over interest rates

Answer 6

-The decision to raise interest rates is ultimately up to banks. Can reduce preciseness of MP.

Question 7

Weaknesses - Ineffective in impacting cost-push inflation

Answer 7

-MP is more effective against demand inflation, and is powerless against cost inflation that is often driving up cost of living