Question

If the Reserve Bank of Australia sells bonds and securities in the open market, this is likely to lead to a:

rise in interest rates and an appreciation of the Australian dollar.

rise in interest rates and a depreciation of the Australian dollar.

fall in interest rates and an appreciation of the Australian dollar.

fall in interest rates and a depreciation of the Australian dollar.

Answer 1

The Central Bank of a country can expand or contract the amount of money in the banking system by buying and selling government securities in the open market. This phenomenon is known as the open market operations, a tool in the monetary policies used by the Reserve Bank of a country.

Under a contractionary monetary policy, the Reserve Bank of a country sells bonds and securities in the open market, which reduces the amount of money in circulation i.e. it decreases the money supply in the economy. This tends to raise interest rates. This higher interest rates attracts foreign investments, increasing the demand for and value of the home country's currency. Thus, the home country's currency appreciates.

Thus, in the given question, if the Reserve Bank of Australia sells bonds and securities in the open market, this is likely to lead to a rise in interest rates and an appreciation of the Australian dollar.