(a) What do you understand by the open market operations? What open market operation would the Reserve Bank conduct when it wants to decrease reserves? What would happen to the balances in commercial banks’ Exchange Settlement Accounts (ESA)?
(b) The RBA has announced a decrease in the cash rate from 2% to 1.75%. Use your knowledge of the relationship between base money and ESA to explain how the RBA’s announcement resulted to the change in the cash rate. Illustrate your answer with the base money diagram.