B3

On the 1rd November 2022 the RBA announced that the new cash rate target would be 2.85%, while keeping the same rules to define the corridor as is the case since November 2020.

(a) Draw a very detailed, labelled and to-scale market for reserves that captures the new target (do NOT represent the old values). Assume that the cash rate is on target.

(3 marks)

(b) Explain how the concept of demand for reserves is distinct from the concept of demand for interbank loans. Explain why the demand for reserves is decreasing with the current cash rate and increasing with the future cash rate target.

(1 mark)

(c) Explain in words only the direction taken by the cash rate after the announcement of the RBA to reach the situation described in (a). Describe precisely the forces at stake that drove that move. [We will not mark your answer if you provide a diagram.]

(2 marks)

Write your answers on a new sheet of paper preferably without lines; write your full name and student number at the top of the sheet; scan or take pictures of your answers; merge the pictures and convert into pdf; upload one pdf file on the link below. Keep the sheet with your answers and the pictures for future reference.