B3 -

Consider the following transactions:

(1) Westpac makes a $25m interbank loan to CBA.

(2) ANZ repays $35m to the RBA as part of the completion of a repurchase agreement of government securities made in the past, with no interest/premium.

(3) CBA receives $0.8m in interest on its ESA from the RBA.

(4) NAB receives payment at the redemption of $10m government bonds paid from the governments account at the RBA.

(5) The RBA buys USD from the US Federal Reserve that, in total, are worth AUD 7m.

b. (i) Show in a detailed and well labelled diagram of market for reserves the effect of the change in ESF described in a (ii) , combined with an increase in the demand for reserves by $40m, on the cash rate. Assume the market for reserves was originally at equilibrium at the current cash rate target of 0.10%.

(4 marks)

(ii) Explain in words the mechanisms that led the adjusment from the original equilibrium to the new equilibrium.