QUESTION 34

B4

On the 3rd November 2020 it was announced that:

(a) Draw a very detailed, complete and to scale market for reserves to reflect these new values interest rates (do not represent the old values). Assume that the cash rate is on target.

In the same diagram, represent with a blue arrow the magnitude of the corridor for the cash rate and with a red arrow the largest distance the cash rate could be away from the target. [If you do not have blue and red pens use <-----> instead of blue and <===> instead of red.]

(6 marks)

(b) What is special about the new corridor, compared to normal circumstances?

(1 mark)

(c) Explain in words only how the market for reserves on the 4th November 2020 has adjusted to reach the new situation described in (a).

(3 marks)

• the cash rate target would be 0.10%,
• the interest on ESF balances would be 10 basis points below the cash rate target and
• the interest of the lending facility would be 25 basis point above the cash rate target.