Question

The Reserve Bank of Australia can increase the cash rate by ________.

		offering to buy back repurchase agreements
		lending cash to banks using repurchase agreements
		purchasing bonds and securities from banks, which decreases banks' reserves
		purchasing bonds and securities from banks, which increases banks' reserves
		selling bonds and securities to banks, which decreases banks' reserves

Answer 1

The correct answer is :- Selling bonds and securities to banks, which decreases banks' reserves

Explanation : - Cash rate is defined as the interest rate charged on loans in the overnight money market. To increase the cash rate the Reserve Bank of Australia can sell bonds and securities to banks which will result in the reduction of financial reserves because the banks have to pay the RBA for the purchase of bonds or securities. When the financial reserves in banks are reduced, banks have less money to make loans and demand for loans increases which in turn increases the cash rate.