Australians' Economic Literacy: Understanding RBA's Impact on Inflation

Economics is a word we are all familiar with, but knowing is different from understanding.

The Reserve Bank has released its latest public survey of Australians to gauge how much we know about how the economy works and how the RBA’s actions affect things such as inflation, employment and growth.

The central bank has a big stake in this issue: its surveys find that those who have a better handle of key economic concepts are also more likely to understand why the RBA makes its (frequently unpopular) decisions around interest rates, and to trust that it’s doing the right thing.

They have also found that the higher the level of economic literacy, the higher your trust in the bank, and the lower you expect inflation to be in the future – which is half the battle for monetary policymakers.

To gauge your own knowledge, take the RBA’s quiz below and then compare yourself against how your fellow citizens scored:

If you scored more than four out of eight questions right, then well done: you’re above average!

The RBA’s survey of a nationally representative sample of respondents shows that people get half of them correct on average.

And when it comes to monetary policy, there’s one question that bedevils many of us: only one in four correctly identified that an increase in interest rates would lead to lower inflation.

In fact, most Australians believe higher rates will lead to higher inflation.

Peter Rickards, manager of the RBA’s public education team, says that Australians have a strong understanding of economic issues that relate firmly to their lived experience. For example, we know we are worse off when prices are rising faster than our wages.

But Rickards says the impact of higher interest rates on inflation is “quite complex”.

Most of us think more about the cost side of the equation: higher interest rates means higher business costs, which means firms have to raise their prices.

Economists, on the other hand, know that higher interest rates slow the economy and make it harder for firms to pass on those higher prices as fewer consumers come through the door.

As the RBA’s latest report notes, this misunderstanding of how higher rates impact inflation could lead to some “frustration”.

“It’s important for us to explain these concepts to the public,” Rickards says.