Question

QUESTION 4 Which of the following statements does describe the "cash rate" most accurately? The cash rate is the interest rate that the RBA charges banks for unsecured overnight loans. The cash rate is the interest rate that banks charge each other for unsecured overnight loans The cash rate is the interest rate that the RBA charges banks for secured overnight loans. The cash rate is the interest rate that banks charge each other for secured overnight loans. QUESTION 5 You are the bank manager and currently the cash rate is very high. You should NOT own a relative large amount of ESF because you can borrow it on short notice cheaply. You should own a relative large amount of ESF in case of a liquidity shortage, but lend it out to other banks to earn the cash rate. You should borrow a relative large amount of ESF now to be prepared for a liquidity shortage in the future You should own a relative large amount of ESF and keep it on your ESA (exchange settlement account) in case of a liquidity shortage.

Answer 1

4. In Australia cash rate is defined as the unsecured interbank lending rate.

Therefore the second option most appropriately describes the Cash rate.

5. When cash rate increases then the liquidity decreases.

Banks have an incentive to lend at a higher cash rate and earning a higher cash rate by lending more to other banks. Option B.

Refer the rba.gov.au there in the eduction section they have clearly mentioned the same.