Question 1:

a. The cash rate is the interest rate that the Reserve Bank of Australia (RBA) sets as its monetary policy
tool to influence borrowing, lending, and spending in the economy. It represents the interest rate that
commercial banks pay or receive on the overnight funds they hold with the RBA.

b. The cash rate and the interest rate are related but not the same. The cash rate is the interest rate set
by the RBA, while the interest rate refers to the cost of borrowing or the return on savings. Commercial
banks use the cash rate as a benchmark to set their lending and deposit interest rates, which can be
higher or lower than the cash rate depending on various factors such as the borrower's
creditworthiness, the loan term, and the type of loan.

c. Only commercial banks and financial institutions can borrow funds at the cash rate. The RBA offers
overnight loans to banks and other financial institutions at the cash rate, which they can use to manage
their daily cash flow and meet the reserve requirements set by the RBA. However, the cash rate does
not directly determine the interest rates that banks charge their customers. The lending rates offered by
banks are influenced by a range of factors such as the RBA's cash rate, the cost of funds, the demand for
loans, and the competitive environment in the market. Therefore, the actual interest rate that an
individual or business can borrow at will depend on their creditworthiness, the loan amount, and the
loan term.

Question 2:

a. The appropriate AD-AS graph to reflect the current conditions of the Australian economy is one with a
leftward shift in the aggregate demand (AD) curve and a leftward shift in the short-run aggregate supply
(SRAS) curve.

b. Given the economic conditions described above, the Reserve Bank of Australia (RBA) needs to
implement an expansionary monetary policy to stimulate economic growth, increase employment, and
raise inflation to its target range of 2-3%. This can be achieved by reducing the cash rate, which would
lower borrowing costs for households and businesses, increase spending, and boost aggregate demand.

c. To implement the expansionary monetary policy, the RBA can undertake Open Market Operations
(OMOs) by purchasing government securities from commercial banks. This would increase the amount
of reserves that banks hold with the RBA, which would encourage them to lend more to customers at
lower interest rates. As a result, this would stimulate spending and boost aggregate demand in the
economy.

Alternatively, the RBA can lower the cash rate, which would reduce the interest rate that commercial
banks pay on overnight funds held with the RBA. This would lower borrowing costs for households and
businesses, making it more attractive for them to borrow and spend, and thus stimulate economic
growth. The RBA may also use other monetary policy tools such as forward guidance, quantitative
easing, and lending facilities to support the expansionary policy stance.

Question 3:

The RBA's decision to raise the cash rate in the midst of the global financial crisis (GFC) would have
affected the aggregate demand in the Australian economy in several ways.

Firstly, the increase in the cash rate would have led to a decrease in investment spending, as businesses
and households would face higher borrowing costs. This would cause a leftward shift in the aggregate
demand curve.

Secondly, the increase in the cash rate would have decreased the consumption spending of households,
as it would have become more expensive for them to borrow and spend on goods and services. This
would also cause a leftward shift in the aggregate demand curve.

Thirdly, the increase in the cash rate would have led to a rise in the value of the Australian dollar, as
foreign investors would find it more attractive to hold Australian assets due to the higher interest rates.
This would result in a decrease in net exports, as Australian exports would become more expensive and
less competitive in the global market.