Question

a) Explain why Australia's currency is suitable to use as a medium of exchange.

b) How does the existence of financial intermediaries affect liquidity in the financial market?

c) What role does the Reserve Bank of Australia (RBA) have in the economy?

d) Why does an open market purchase of government securities by the RBA increase bank reserves? Why does an open market sale of government securities by the RBA decrease bank reserves?

Answer 1

A. Australia's currency is suitable to use as a medium of exchange because it a legal tender i.e. there is a promise that its use cant be rejected. Hence people are assured about its use because everyone considers it a standard form of money.

B.The existence of financial intermediaries is neccessary to maintain liqidity in the economy. this is because people go the banks to deposit money or to take loan (basic function). Liquidity can change by changing the borrowing and lending rate. if the borrowing rate is increased then people will nt borrow much and hence less liquidity will prevail in the economy and vice versa.

C. Open market purchse of government securities by the RBA increase bank reserves as they purchase they give money in the economy and that money is returned in the form of bank reserves as the money supply is increased.

Similarly, an open market sale of government securities by the RBA decrease bank reserves as the money supply in the economy is reduced.