According to the RBA website, the current inflation rate is 1.5%. The RBA normal

Question

According to the RBA website, the current inflation rate is 1.5%. The RBA normally aims for inflation to be between 2 and 3 per cent. Since inflation is below 2%, and in reference to the media release by Glenn Stevens, why didn’t the RBA reduce the cash rate?

A. Reducing the cash rate will discourage spending as it will cause prices to rise

B. Reducing the cash rate will discourage spending, causing business profits to fall and an increase in unemployment

C. Reducing the cash rate would encourage more spending and less saving

D. Reducing the cash rate would reduce the cost of borrowing and cause further rises in house prices

Explanation / Answer

Ans: RBA did not reduce the cash rate because the reduction in cash rate would lead to a reduction in the cost of borrowing and thus lead to a rise in the house prices.

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