Question

Suppose the overnight cash rate is above the Reserve Bank's target cash rate. The Reserve Bank should respond by:

Select one:

a. increasing its purchase of bonds, thus reducing the exchange settlement accounts.

b. increasing its purchase of bonds, thus increasing the exchange settlement accounts.

c. increasing its sale of bonds, thus increasing the exchange settlement accounts.

d. increasing its sale of bonds, thus reducing the exchange settlement accounts.

Answer 1

Option C is correct

Increasing its sale of bonds thus increasing the exchange settlement account

Because

Settlement should occur during the daily settlement station unless otherwise agreed by the reserve Bank. When settlement takes place using currency notes the central bank may not be immediately aware that a bank cannot meet its settlement obligations. The central bank provide the funds to allow settlement to occur and then seek to recover them from the field Bank.