Discuss the actions the RBA should take if it believes the e

Discuss the actions the RBA should take if it believes the economy is about to fall into recession

Solution

If the economy falls into recession, it would be characterized by a fall in aggregate demand which will lower price level and real GDP. To boost the economy, RBA as the Central Bank should implement an expansionary monetary policy of increasing money supply, which will decrease interest rate, thus increasing investment and consumption demands, and increasing aggregate demand.

An expansionary monetary policy can be implemented by open market purchase of government securities, and/or lowering required reserves ratio and/or lowering bank rate.