If the Reserve Bank of New Zealand (RBNZ) decreases the official cash rate (OCR), which of the following best describes what happens next, ceteris paribus?Group of answer choicesTrading banks hold larger settlement cash balances, money supply increases, and the market interest rate falls.Trading banks hold smaller settlement cash balances, money supply decreases, and the market interest rate falls.Trading banks hold smaller settlement cash balances, money supply increases, and the market interest rate rises.Trading banks hold smaller settlement cash balances, money supply increases, and the market interest rate falls.
Question
If the Reserve Bank of New Zealand (RBNZ) decreases the official cash rate (OCR), which of the following best describes what happens next, ceteris paribus?Group of answer choicesTrading banks hold larger settlement cash balances, money supply increases, and the market interest rate falls.Trading banks hold smaller settlement cash balances, money supply decreases, and the market interest rate falls.Trading banks hold smaller settlement cash balances, money supply increases, and the market interest rate rises.Trading banks hold smaller settlement cash balances, money supply increases, and the market interest rate falls.
Solution
The best description of what happens next, ceteris paribus, when the Reserve Bank of New Zealand (RBNZ) decreases the official cash rate (OCR) is: "Trading banks hold larger settlement cash balances, money supply increases, and the market interest rate falls."
Here's why:
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When the RBNZ decreases the OCR, it essentially makes borrowing cheaper. This encourages trading banks to borrow more from the RBNZ.
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As trading banks borrow more, they end up holding larger settlement cash balances. This is because they now have more cash on hand due to the increased borrowing.
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The increase in borrowing also leads to an increase in the money supply. This is because the money that the trading banks have borrowed from the RBNZ is now in the economy, either through loans to customers or other investments.
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Finally, the increase in the money supply puts downward pressure on the market interest rate. This is because there is now more money available for lending, which decreases the cost of borrowing (i.e., the interest rate).
Similar Questions
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The Reserve Bank of Australia can decrease the cash rate by: borrowing cash from the banks using reverse repurchase agreements. selling bonds and securities to households. transferring money from banks to the RBA. lending cash to banks using repurchase agreements. purchasing bonds and securities from banks, which decreases banks' reserves.
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