When the RBA sells/buys second hand government securities, what effect will it have on the supply of money and hence the cash rate?
Hi!
Selling second-hand government securities (Commonwealth Government Securities/CGS) (Contractionary Monetary Policy)Aim: Slow down economic activity + reduce inflationary pressure
- RBA sells CGS (receives money from Exchange Settlement Accounts/ESA)
- Decrease of borrowable funds in Short Term Money Market (STMM)
- Upwards pressure on cash rate
- Upward pressure on market interest rates (banks want to maintain profit margins)
- Investment and Consumption decreases (more expensive to repay loans)
- Level of economic activity decreases
Buying second-hand government securities (Expansionary Monetary Policy)Aim: Stimulate economic activity and reduce the rate of unemployment (periods of low growth)
- RBA purchases CGS (deposits money into ESA)
- Increase of borrowable funds in STMM
- Downwards pressure on cash rate
- Downward pressure on market interest rates
- Investment and Consumption increases
- Level of economic activity increases
Hope this helps!
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