State (1 mark) and explain briefly the simple, very short-term relationship between inflation and unemployment?
There is an inverse relationship between unemployment and inflation i.e. if inflation will increase the rate of unemployment will decrease and if the rate of unemployment will decrease the rate of inflation will increase. This situation occurs because when there will be situation of inflation people will spend less on consumption so demand for products will be less which will reduce the need for employees in the organisation this will result in unemployment. The situation will be totally reverse in case of decrease in inflation and increase in unemployment (Truman, 2003).
d)Explain the use of ‘Open-market operations’ by the Reserve Bank?
Open market operations are the measures adopted by the banks for selling and buying of government securities and bonds in the open market i.e. anybody can buy these bonds and securities (Collins, 2004).
1)It is the most flexible means used in implementing the monetary policy of the country.
2)It is used in the purchase of securities from the third party.
3)It helps in stabilising market interest rates on the supply of reserves of balance with the banks and achieves monetary policy targets.
4)The maturing securities of the banks can be re-invested in new securities and old securities can also be redeemed.
e)During the GFC many central banks have engaged in ‘quantitative easing’. Doing so has been controversial. Explain what quantitative easing is (2 marks) and provide an outline of two of the issues over which there has been so much controversy?
Quantitative easing is the policy of the process by which the flow of money is increased in the market. It is done by providing more money to banks so that lending and liquidity can be increased with lowered interest rates (Robertson, 1990).