Question

The following table shows the real interest rate and the annual inflation rate (using the CPI) of Australia in the period 1971-19955 (Source: OECD).

- Inflation rate (%) : 1971-75 = 10.4, 1976-80 = 10.6, 1981-85 = 8.3, 1985-90 = 7.9, 1991-95 = 2.5
- Real interest rate (%) : 1971-75 = -2.2, 1976-80 = -0.4, 1981-85 = 6.1, 1985-90 = 7.1, 1991-95 = 4.5
Based on this information, which of the following statements are correct? q10
A. Monetary policy was looser in the 5-year period following the peak of inflation.
B. In 1981-85, the real interest rate (and nominal interest rate) were both higher than in the preceding period, indicating that monetary policy was tighter.
C. The nominal interest rate was lower in the periods in which inflation was lower.
D. none of the options

Answer 1

Monetary policy was tighter in the 1981-1985 period compared to the preceding period, indicating higher real and nominal interest rates. The nominal interest rate generally decreases in periods of lower inflation. Therefore, the correct option is B and C.

Step-by-step explanation:

In the 1970s, Australia experienced high inflation rates, which prompted a tight monetary policy by the Federal Reserve. The real interest rates were negative during this period, indicating loose monetary policy. However, in the 1981-1985 period, the real interest rate was higher than in the preceding period, showing a tighter monetary policy. So, option B is correct.

In the periods of lower inflation, the nominal interest rate was generally lower. This is because lower inflation reduces the need for high interest rates to combat inflation. Therefore, option C is also correct.

Based on the information provided, option A is incorrect as monetary policy was tighter in the period following the peak of inflation.

Therefore, the correct statements are B and C.