Suppose the overnight cash rate is above the Reserve Bank's target. The Reserve Bank should respond by:Group of answer choicesdecreasing its purchase of financial assets, putting the exchange settlement accounts into a surplus position that expands lending on the overnight marketincreasing its purchase of financial assets, putting the exchange settlement accounts into a deficit position that contracts lending on the overnight marketincreasing its purchase of financial assets, putting the exchange settlement accounts into a surplus position that expands lending on the overnight marketdecreasing its purchase of financial assets, putting the exchange settlement accounts into a deficit position that contracts lending on the overnight market
Question
Suppose the overnight cash rate is above the Reserve Bank's target. The Reserve Bank should respond by:Group of answer choicesdecreasing its purchase of financial assets, putting the exchange settlement accounts into a surplus position that expands lending on the overnight marketincreasing its purchase of financial assets, putting the exchange settlement accounts into a deficit position that contracts lending on the overnight marketincreasing its purchase of financial assets, putting the exchange settlement accounts into a surplus position that expands lending on the overnight marketdecreasing its purchase of financial assets, putting the exchange settlement accounts into a deficit position that contracts lending on the overnight market
Solution
The Reserve Bank should respond by increasing its purchase of financial assets, putting the exchange settlement accounts into a surplus position that expands lending on the overnight market.
Here's the step by step explanation:
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The overnight cash rate is the interest rate on loans that financial institutions make to each other for a period of one day (overnight). If this rate is above the Reserve Bank's target, it means that borrowing money is more expensive than the central bank wants it to be.
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To bring the overnight cash rate down, the Reserve Bank can increase its purchase of financial assets. This means the Reserve Bank is injecting more money into the financial system.
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When the Reserve Bank buys these assets, it pays for them by crediting the exchange settlement accounts of the banks from which it bought the assets. This increases the amount of money in these accounts.
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With more money in their exchange settlement accounts, banks have more to lend to each other on the overnight market. This increase in supply of funds for lending should, according to the laws of supply and demand, lower the price of borrowing money overnight - i.e., it should lower the overnight cash rate.
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Therefore, by increasing its purchase of financial assets and putting the exchange settlement accounts into a surplus position, the Reserve Bank can expand lending on the overnight market and bring the overnight cash rate down to its target level.
Similar Questions
Which of the following statements is correct? Group of answer choices The exchange settlement funds rate and the repo rate influence the cash rate but not the effective supply curve for funds in the overnight market. The payment of interest on exchange settlement accounts does not act as a limit on the actual cash rate. The charging of a rate of interest by the Reserve Bank for loans sets the lower limit on the rate for borrowing on the overnight market. The demand curve for funds in the overnight market cannot extend above the so-called ‘repo rate’ charged by the Reserve Bank for loans.
An increase in the supply of cash on the overnight money market will lead to a(n) ____________ in interest rates and a(n)_________ in investment expenditure. a. decrease; decrease b. decrease; increase c. increase; decrease d. increase; increase
If the Reserve Bank of Australia lowers its target for the cash rate, this indicates that it is: a. pursuing a contractionary monetary policy. b. attempting to combat inflation. c. pursuing an expansionary monetary policy. d. concerned that the growth in aggregate demand will exceed potential GDP.
Which of the following is a consequence of an increase in the supply of cash in the overnight money market?An increase in interest rates, and eventually an increase in net exports.An increase in interest rates, and eventually a decrease in investment expenditure.A fall in interest rates, and eventually an increase in investment expenditure.A fall in interest rates, and eventually a decrease in net exports.A fall in interest rates, and eventually a decrease in consumption expenditure.
If the Reserve Bank of Australia aims to lower the cash rate, it will:Group of answer choicessell government securities.buy US dollars and sell government securities.increase the budget deficit.buy government securities.
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