another multi choice Q help plz (1 Viewer)

[lollipoplisa7]

ok....heres the question

what action could the reserve bank take in place to reduce the rate of inflation:

A -Sell government securities to create a surplus of funds in the market.
B -Sell government securities to create a shortage of funds in the market.
C -Buy government securities to create a surplus of funds in the market.
D -Buy government securities to create a shortage of funds in the market.

i put A cause i thought inflation is d>s (high i/r) therfore selling securities increases supply of funds creating surpllus and downward pressure onn inflation....
or if govt sells securities at lower/ higher i/r pressure on others? i duno im confusing myself....i just cant get my head around it....
of course answer is B but im like stuck...could someone explain please....thank

 

[pat.daly]

If the RBA sells gov't securites, its contractionary because theres less money in the economy (cos they gave it to the RBA).

If the RBA buys gov't securites, its expansionary because theres more money in the economy (cos the RBA gave the money out in return for the bonds).

So to reduce inflation, they want to have a contractionary policy. Therefore they want to sell gov't securities.... (eliminating options C and D) and they want to create a shortage of funds in the market.... (eliminating option A)..... therefore leaving option B.

 

[Adimus]

yes pat is right.

by selling gov securities, there is a decrease in supply in the cash rate, therefore it is contractionary MP or tightening MP stance, where interest rates have risen, and of course when interest rates have risen, domestic consumption decreases thus lowering AD and therefore lowering the effects of inflation in the economy

 

[lollipoplisa7]

thanks a bunch
my head is getting so confused trying to remeber everything my logic has flown out the window....xoxo