a) Keynesian model presumes an inverse relationship between real interest rate and household consumption expenditure which partly justifies the monetary easing policy to fend off economic weakness in recession periods.
Please describe the transmission mechanism of interest rate through the economy in general.
b) How can RBA influence the economy wide interest rates?
c) It seems that the RBA followed this textbook prescription and cut the cashrate several rounds in the aftermath of GFC.
Currently, as shown in thefigure, the real interest rate in Australia is at record low levels. Yet, thehousehold saving ratio has been stubbornly high. Why does this monetary policy transmission channel fail to work? Please discuss the underlyingforces.
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this is my assignment for macro economics. The word limit is 1000 and I have one more documents that you will need to go through before start writing.
Also, here are some key points that my lecturer mentioned.
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Please note that you need to answer all three questions (i.e parts (a), (b) and (c)) of the assignment in ONE essay with a word limit of 1000 words.
Some hints:
Part (a) of the assignment is asking about the transmission mechanism/channels through the interest rate to the components of PAE and subsequently to short-run equilibrium output. I.e Which components are affected by changes in the interest rate and how?
Part (b) is asking how the RBA can influence the economy wide interest rates via controlling only the cash rate.