Understanding Cash Rate and Risks

Which of the following is a primary tool used by the Reserve Bank of Australia (RBA) to implement monetary policy?

• Setting the company tax rate

• Adjusting the cash rate

• Regulating petrol prices

• Controlling export quotas

What is the cash rate?

• The interest rate charged on personal loans

• The interest rate on credit cards

• The overnight interest rate on unsecured loans between banks

• The rate at which the government borrows from the public

How does an increase in the cash rate typically affect borrowing costs for households and businesses?

• It decreases borrowing costs

• It has no effect on borrowing costs

• It increases borrowing costs

• It only affects government borrowing

Which of the following best describes credit risk?

• The risk that a bank will not have enough cash to meet withdrawals

• The risk that a borrower will fail to repay a loan

• The risk of changes in interest rates

• The risk of currency fluctuations

How can a higher cash rate impact credit risk for banks?

• It reduces credit risk by making loans cheaper

• It increases credit risk as borrowers may struggle to repay more expensive loans

• It eliminates credit risk entirely

• It has no impact on credit risk

What is liquidity risk in banking?

• The risk of losing money due to exchange rate changes

• The risk that a bank cannot meet its short-term financial obligations

• The risk of a borrower defaulting on a loan

• The risk of inflation rising

Which of the following actions can help a bank manage liquidity risk?

• Increasing long-term lending

• Holding more liquid assets such as cash or government bonds

• Reducing the number of staff

• Raising the interest rate on savings accounts

What is the interest rate margin for a bank?

• The difference between the cash rate and the inflation rate

• The difference between the interest rate charged on loans and the interest rate paid on deposits

• The total amount of interest earned in a year

• The rate at which the RBA lends to banks

If the cash rate increases, what is the likely effect on a bank’s interest rate margin, assuming other factors remain constant?

• It will always decrease

• It will always increase

• It may increase or decrease depending on how banks adjust their rates

• It will not change

Which economic indicator is most closely watched by the RBA when deciding on changes to the cash rate?

• Unemployment rate

• Inflation rate

• Exchange rate

• Trade balance