Principles of Economics (11)

Why is money necessary in the economy?

• Because money is used for exchange

• Because money is unit of accounting

• Because money can be used to store wealth

• All three functions above.

What is the function of Exchange Settlement Accounts in settling transactions between the commercial banks?

• These accounts allow the banks to settle transactions between them.

• The interest rate return on the ESA is 25 basis points lower than the going cash rate, whereas banks borrowing from the RBA come at 25 basis points higher than the going cash rate. For those reasons, banks prefer to borrow from the Overnight Money Market when they experience shortage of ESA funds and lend out excess funds when they occur.

• The sale of bonds by the Reserve Bank of Australia to the commercial banks impact on the size of the funds held by the commercial banks in their Exchange Settlement Accounts

• All three above are the functions of ESA.

Open market operations when the RBA sells bonds

• the liquidity will decrease and the interest rate will increase.

• the liquidity will increase and the interest rate will increase.

• the liquidity will decrease and the interest rate will decrease.

• the liquidity will decrease and the interest rate will decrease.

What are the policy actions of a expansionary fiscal policy?

• Decrease in government purchases and/or increase in tax.

• Decrease in government purchases and/or decrease in tax.

• Increase in government purchases and/or increase in tax.

• Increase in government purchases and/or decrease in tax.

What are the policy actions of a contractionary fiscal policy?

• Decrease in government purchases and/or increase in tax.

• Decrease in government purchases and/or decrease in tax.

• Increase in government purchases and/or increase in tax.

• Increase in government purchases and/or decrease in tax.

What are the policy actions of a contractionary monetary policy?

• Decrease the cash rate and/or decrease in the money supply.

• Decrease the cash rate and/or increase in the money supply.

• Increase the cash rate and/or decrease in the money supply.

• Increase the cash rate and/or increase in the money supply.

What are the policy actions of a expansionary monetary policy?

• Decrease the cash rate and/or decrease in the money supply.

• Decrease the cash rate and/or increase in the money supply.

• Increase the cash rate and/or decrease in the money supply.

• Increase the cash rate and/or increase in the money supply.

The expansionary fiscal policy is implemented

• to combat economic recession

• to combat high inflation

• to combat trade deficit

• to combat budget deficit

The contractionary monetary policy is implemented

• to combat economic recession

• to combat high inflation

• to combat trade deficit

• to combat budget deficit

The contractionary fiscal policy is implemented

• to combat economic recession

• to combat high inflation

• to combat trade deficit

• to combat budget deficit