Question
Help me understand how to approach this question, sorry for the multiple sections. If its an issue no worries. Thanks The RBA will use open
Help me understand how to approach this question, sorry for the multiple sections. If its an issue no worries. Thanks
The RBA will use open market operations in addition to increasing the cash rate.
Assume that a bond with no expiration date pays a fixed $2,400 annual interest and is selling for its face value of $75,000.
(i) Calculate the interest yield on the bond.
(ii) Will the RBA buy or sell bonds if it uses open market operations? Briefly explain.
(iii) As a result of the RBA's decision above which of these two outcomes is more likely or correct?
1. The market value of the bond will increase to $80,000 OR
2. The market value of the bond will decrease to $60,000.
In your answer calculate the new interest yield after the RBA's open market operations; show your workings.
(iv) Briefly explain why the market value and yield of the bond has changed.
(v) Assume that bank deposits increased by $14,500 million in 2022. Also assume that banks held 12.5% of deposits as reserves.
Calculate the value of the money multiplier. And calculate the maximum amount by which the money supply can change and in what direction due to the increase in deposits and the effect of money (credit) creation.
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