| Criteria | Marks |
|---|
| Demonstrates a clear and comprehensive understanding of the impacts of a decrease in the cash rate on an economy | 5 |
| Demonstrates a sound understanding of the impacts of a decrease in the cash rate on an economy | 4 |
| Demonstrates some understanding of the impacts of a decrease in the cash rate on an economy | 3 |
| Provides some understanding of the cash rate in an economy | 2 |
| Provides some relevant information | 1 |
Sample answer:
A decrease in the cash rate lowers borrowing costs and increases credit availability in the economy as changes in the cash rate flow on to the other interest rates in the economy. This allows households to borrow more or repay less on existing loans, leaving them with increased disposable income, enabling higher consumption. Businesses are also more likely to invest due to cheaper financing and this promotes long-term economic growth. As a result, increased aggregate demand and supply support higher output and employment. However, if increases in demand outpace the growth in supply capacity, it can lead to inflationary pressures over time.
Answers could include:
- Cheaper borrowing costs
- Increased access to credit
- Higher disposable income and consumption
- Business investment and expansion
- Increased aggregate demand
- Long-term economic growth
- Inflationary pressures
- Depreciation of currency.