The policy instrument used by the Reserve Bank of Australia (RBA) is a target

value for the Cash Rate.

(i) What is the role of the Cash market?

(1 mark)

(ii) Explain the mechanisms by which the RBA is able to achieve its target value

for the cash rate. How does the RBA ensure the actual cash rate equals its target

value?

(4 marks)

(iii) Suppose the RBA undertakes a very large program of purchasing bonds from

the banking system. What are the likely consequences for its ability to achieve its

cash rate target?

(1 mark)

(iv) Suppose the RBA wants to reduce long-term interest rates. Explain which of

the following strategies is likely to have a larger effect on current long-term

rates.

(a) The RBA reduces the current value of the Cash Rate.

(b) The RBA reduces the current value of the Cash Rate and indicates it

intends further reductions in the future.

(2 marks)

(v) In response to Covid-19 the RBA reduced its target for the Cash rate from

0.75 to 0.25 percent. Discuss two different mechanisms by which this policy

might stimulate economic activity.

(2 marks)