9. If the actual overnight cash interest rate exceeded the Reserve Bank’s target

Question

9. If the actual overnight cash interest rate exceeded the Reserve Bank’s target for the overnight cash interest rate, the Reserve Bank would a. sell bonds to the banks, raising the level of balances in banks’ exchange settlement accounts. b. sell bonds to the banks, lowering the level of balances in banks’ exchange settlement accounts. c. buy bonds from the banks, raising the level of balances in banks’ exchange settlement accounts. d.. buy bonds from the banks, lowering the level of balances in banks’ exchange settlement accounts.

Explanation / Answer

If the interest rate was higher than the actual interest rate then government would buy bonds from the banks which will increase the level of banks exchange settlement accounts and lower interest rate, shifting LM curve to the right

answer-c

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