ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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raise the reserve ratio
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raise the discount rate
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raise the Federal Funds rate
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buy bonds
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Detailed explanation-1: -For the RBA, the purchased bonds pay a fixed return, while the interest paid on the Exchange Settlement (ES) balances created to pay for the bonds varies with monetary policy settings. As interest rates increase there is a financial cost to the RBA from this.
Detailed explanation-2: -The RBA buys or sells bonds in exchange for ES balances – cash. As a result, these transactions change the supply of cash in the market.
Detailed explanation-3: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.
Detailed explanation-4: -Buying bonds injects money into the money market, increasing the money supply. When the central bank wants interest rates to be higher, it sells off bonds, pulling money out of the money market and decreasing the money supply.