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) neither changes the inflation rate nor the output gap

b) changes the inflation rate but not the output gap

c) changes both the inflation rate and the output gap

d) changes the output gap but not the inflation rate

Wrong! - Does setting the policy rate equal to the neutral rate change the inflation rate or the output gap?

You Got It! - When the Official Cash Rate is set equal to the neutral rate, neither the inflation rate nor the output gap changes.

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 2.5%

c) equal to 2.0%

d) higher than 2.5%

Wrong! - The Official Cash Rate of 2.5% encourages borrowing. What does that tell us about the neutral rate?

Well Done! - The Official Cash Rate of 2.5% still encourages borrowing, so it must be below the neutral rate.

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) an increase; fall instantly

b) a decrease; fall instantly

c) a decrease; fall within one to two years

d) an increase; fall within one to two years

Wrong! - How does a policy interest rate above the neutral rate influence consumption, investment, and aggregate demand? How quickly do changes in monetary policy influence the inflation rate?

Correct! - A policy interest rate above the neutral rate reduces consumption and investment. Aggregate demand decreases, and inflation typically falls within one to two years.

The RBNZ follows inflation targeting. What is inflation targeting?

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

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

b) grows the quantity of money at a constant rate

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

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

Wrong! - Is inflation targeting successful if it is based on an unannounced inflation target or if the target inflation rate is frequently changed? Is growing the quantity of money at a constant rate consistent with inflation targeting?

That's Right! - Inflation rate targeting is a monetary policy strategy in which a central bank makes a public commitment to achieve an explicit target and explains how its policy actions will achieve it.

Share this: