What does the RBA do in response to high demand for funds in the Overnight Money market?
Understand the Problem
The question is asking about the actions taken by the Reserve Bank of Australia (RBA) in reaction to a situation of high demand for funds in the Overnight Money market. It seeks to identify the correct monetary policy response among the provided options.
Answer
Buys bonds to increase liquidity
The final answer is B) Buys bonds to increase liquidity
Answer for screen readers
The final answer is B) Buys bonds to increase liquidity
More Information
When there is high demand for funds in the Overnight Money market, the RBA typically buys bonds to increase liquidity. This action helps lower interest rates, facilitating borrowing and lending among banks.
Tips
A common mistake is confusing the effect of selling bonds with purchasing bonds. Selling bonds decreases liquidity, while purchasing them increases it.
Sources
- How the Reserve Bank Implements Monetary Policy | Explainer - rba.gov.au
- About Monetary Policy | RBA - rba.gov.au
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