ECN 101 Lecture Notes - Lecture 24: Monetary Base, Money Multiplier, Money Supply
Document Summary
Do i know the implications of the quantity theory of money. Rba changes the cash rate via announcements, but maintains via omo. Rba uses omo to control the level of reserves in the esa"s of commercial banks (ie: the monetary base of the economy). The deamnd for exchange settlement funds fluctuates from day to day, so omo is used to maintain the actual cash rate from fluctuating away from the target cash rate. Exchange settlement accounts accounts kept by the commercial banks with the rba that are used by the banks to settle their obligations with each other. Esa"s pay low interest, but commercial banks cannot have too little funds in esa"s. Eg: actual cash rate is above the target cash rate. Rba will buy, increasing funds in esa"sof commercial banks. Since funds in esa"s earn little interest, commercial banks have an incentive to lend out funds on overnight cash market.
