Question

What role does the Reserve Bank of Australia (RBA) have in the economy? Explain what open market operations are.

Answer 1

The Reserve Bank of Australia is the central bank of Australia. It conducts monetary policy and issues currency the Australian dollar. It looks after the stability of financial system and Strenghthen the efficiency and safety of the payment system. The key policy rate is the cash rate( interest rate on overnight loans in the money market). RBA alters cash rate accordingly to regulate economy.

Open market operation(OMO) is a monetary policy tool exercised by the central bank to regulate the supply of money in an economy. There are two kinds of open market operation: Expansionary and contractionary. In expansionary OMO, central bank buys bonds and pays for it by printing money which increases the supply of money in the economy. In contrast, Contractionary OMO involves selling of bonds by the central bank which ultimately leads to fall in the supply of money in the economy. Thus OMO is an effective tool of central banks's monetary policy to regulate supply of money and thereby inflation in the economy.