Question

If $500 million of New Zealand Government Bonds were due to reach maturity next Thursday, describe the likely steps the Reserve Bank of New Zealand (RBNZ) will undertake on that day to manage the e↵ects this repayment of debt on the money supply, including the most likely financial instruments they will use. Further, discuss your proposed actions in the wider context of their mandate to keep inflation in a 1-3% band over the medium term.

Answer 1

The easiest thing that the RBNZ could do would be to print more money and increase its money supply. However that is not exactly an appropriate solution because it would increase the rates of inflation by leaps and bounds and be a cause of detriment for the economy.

Therefore, the likely steps that they could use are discussed below:

• Lowering Short term Interest Rates - This would increase money supply and boost economic activity. However, it could also be a cause of surging inflation rates.
• Lowering Reserve Requirements - This would again keep more cash with the commercial banks to lend thus increasing the money supply in the economy.
• Conducting Open Market Operations - The RBNZ could buy or sell government bonds from or to the public thus altering the money supply available in the economy.