If the Reserve Bank of Australia (RBA) decides to raise the cash rate, the reserves will _______, the monetary base will _______, and the money supply will _______.A.increase, decrease, decreaseB.increase, incresase, increaseC.decrease, increase, increaseD.decrease, decrease, decrease
Question
If the Reserve Bank of Australia (RBA) decides to raise the cash rate, the reserves will _______, the monetary base will _______, and the money supply will _______.A.increase, decrease, decreaseB.increase, incresase, increaseC.decrease, increase, increaseD.decrease, decrease, decrease
Solution
When the Reserve Bank of Australia (RBA) raises the cash rate, it essentially makes borrowing more expensive. This means that banks and other financial institutions are less likely to borrow reserves from the RBA, leading to a decrease in reserves.
The monetary base, which consists of reserves plus currency in circulation, will also decrease as a result. This is because the monetary base is directly affected by changes in reserves.
Finally, the money supply will decrease. The money supply consists of the monetary base plus deposits created by commercial banks through lending. When the cash rate is high, banks lend less because it is more expensive to borrow from the RBA. This leads to fewer deposits and a smaller money supply.
So, the answer is D. decrease, decrease, decrease.
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