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 government’s account at the RBA.

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

a. (i) Show how the balance sheet of the RBA is affected by these transactions. Represent all transactions in the same balance sheet and indicate for each transaction the item number as shown in the list. Assume that the US Federal Reserve has an account at the RBA in Australian dollars and that the RBA has an account at the Fed in US dollars.

(ii) Calculate the overall net impact of these transactions on the supply of Exchange Settlement Funds (ESF) in the banking system.

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%.

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

c. (i) Using a different colour, represent the action of the RBA on the diagram in b(i) as part of its cash rate targeting policy at 0.10%.

(ii) Describe the transactions that the RBA is likely to have done to reach the outcome described in c (i).