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Questions and Answers
What role does the central bank play in terms of financial stability during an economic crisis?
What role does the central bank play in terms of financial stability during an economic crisis?
How do banks generate profit from depositors' funds?
How do banks generate profit from depositors' funds?
What happens when liquidity in banks becomes an issue during an economic downturn?
What happens when liquidity in banks becomes an issue during an economic downturn?
What is the effect of the central bank buying assets from banks during a financial crisis?
What is the effect of the central bank buying assets from banks during a financial crisis?
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What could be a result of the central bank maintaining positive cash rates?
What could be a result of the central bank maintaining positive cash rates?
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Study Notes
Cash Rates
- Cash rates should remain positive to allow for future adjustments while maintaining stability.
Central Bank Roles
- European banks utilize central bank support.
- Central banks act as lenders of last resort for commercial banks.
- Central bank actions significantly impact the balance sheets of both themselves and the banking system.
- Reserve banks, like the RBA, act as bankers for other banks.
Government Bonds
- Government bonds represent a liability for the issuer (government).
Bank Profitability and Risk
- Banks earn a profit margin by lending out deposits at a higher interest rate than they pay depositors (e.g., 5% profit margin from a 2% deposit rate and a 7% loan rate).
- During economic downturns, illiquid assets can emerge, and loan repayments become uncertain, impacting bank cash flow.
- Central banks' role as lenders of last resort allows banks to borrow using risky collateral to maintain operations during economic crises.
Central Bank Asset Purchases
- Central banks purchase assets (bonds, securities) from banks, electronically crediting the bank's Exchange Settlement Account.
- This injection of funds increases banks' lending capacity and lowers interest rates.
Monetary Policy Goals
- Examples of monetary policy goals could include maintaining interest rates until specific unemployment rate targets are met.
Monetary Policy Efficacy
- Efficacy refers to the effectiveness of monetary policy actions.
- Raising interest rates makes borrowing more expensive, impacting economic activity.
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Description
This quiz covers key concepts related to cash rates, the roles of central banks, government bonds, and the factors affecting bank profitability and risk. It highlights the importance of central banks in maintaining financial stability and supporting commercial banks during economic downturns.
