The Reserve Bank of New Zealand (RBNZ) Raises its Policy Rate

Answer the following questions to check your understanding of the story.

What is the neutral policy rate?

The neutral policy rate is the interest rate that ____________.

a) changes the output gap but not the inflation rate

b) neither changes the inflation rate nor the output gap

c) changes both the inflation rate and the output gap

d) changes the inflation rate but not the output gap

What does the news clip suggest about the neutral interest rate in New Zealand?

The news clip suggests that the neutral interest rate in New Zealand is ___________.

a) lower than 2.5%

b) equal to 2.0%

c) equal to 2.5%

d) higher than 2.5%

What would happen if the RBNZ raised the Official Cash Rate above the neutral rate?

There would be ___________ in aggregate demand, and the inflation rate would ___________.

a) a decrease; fall instantly

b) an increase; fall within one to two years

c) a decrease; fall within one to two years

d) an increase; fall instantly

The RBNZ follows inflation targeting. What is inflation targeting?

Inflation targeting is a monetary policy strategy in which the central bank ______________.

a) grows the quantity of money at a constant rate

b) meets secretly to agree on an unannounced inflation target rate and then lowers or raises policy interest rates to achieve that target

c) studies supply and demand shocks and responds by regularly changing the target inflation rate

d) publicly commits to an explicit inflation target and to explaining how its actions will achieve that target

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