Australian monetary policy remains 'conventional'. The RBA adjusts the cash rate to influence interest rates throughout the economy. Those changes (although there have been none since 2013) work through the various monetary transmission mechanisms to affect Aggregate Demand (AD) and so inflation.
However when AD is very low and economic growth is really weak there is a limit to the amount conventional monetary policy can do. This occurs where interest rates approach zero. There are no more interest rate cuts possible to boost consumption and investment spending.
In the Eurozone the European Central Bank has set a cash rate of 0.05%. While some countries have set small negative rates (Switzerland for example) it is thought that changes at the rate at this level makes little difference to economic behaviour (Keynes talked of a liquidity trap at low interest rates which might be applicable here).
So the solution adopted in the US, the UK and Japan has been to print money to boost economic activity. This is called Quantitative Easing. The money is used to buy 'bonds' and this drives the price of those bonds up, meaning that they pay holders a lower real rate of interest. This helps by making borrowing cheaper in the economy and also boosting the money supply.
While some might worry about inflation when money is printed in this way they are missing the point. The aim is to inflate the economy, boosting AD and raising the level of economic activity leading to higher GDP and employment. The Eurozone badly needs this stimulus, as do all the countries that trade with Europe.
The BBC page explains the plan and how QE works. Why is this important for VCE? The same monetary transmission mechanisms work in Australia as work in Europe. It is essential you understand them for Unit 4.
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