The RBA intends to use open market operations in addition to reducing the cash rate.

Assume that a bond with no expiration date pays a fixed $750 annual interest and is selling for its face value of $25,000.

(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 $30,000 OR

2.The market value of the bond will decrease to $15,000.

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 increase by $400 million as a result of RBA monetary policy.Also assume that banks hold 12.5% percent of deposits as reserves.

Calculate the following:

-the banks' excess reserves after the increase in bank deposits;

-the maximum amount by which the money supply can expand due to credit creation, if banks decide to lend out their excess reserves.