question archive The cash rate is the interest rate that banks charge one another for short-term (typically overnight) loans
The cash rate is the interest rate that banks charge one another for short-term (typically overnight) loans
Subject:EconomicsPrice:2.88 Bought3
The cash rate is the interest rate that banks charge one another for short-term (typically overnight) loans. When the Reserve Bank of Australia (RBA) uses open-market operations to sell bonds, the quantity of reserves in the banking system _____, banks' demand for borrowed reserves _____, and the cash rate _____.
A. increases, declines, decreases.
B. decreases, rises, increases.
C. increases, declines, increases.
D. decreases, declines, decreases.
E. increases, rises, increases.
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The answer is B. decreases, rises, increases.
When a central bank sells bonds, it takes cash from the banking system since commercial banks need to pay in cash for the bonds. Hence, after this operation, the quantity of reserves in the banking system decreases. Some banks with little cash will need to borrow money from other banks; thus, banks' demand for reserves rises. As the demand for borrowed reserves increases, so does the cash rate because reserves become more attractive to banks, and therefore, will be sold at a higher interest rate.
