role and function of the RBA

Topics: Bank, Inflation, Monetary policy, Central bank, Money, Economics / Pages: 3 (1105 words) / Published: Sep 5th, 2014
The role and function of the reserve bank is to control the country’s money and banking system. The Reserve Bank of Australia is a central bank, who in comparison to other banks have other roles. The role of the central bank or RBA is to set out objectives such as influencing the supply and demand of money through cash rates, making sure that the inflation rate is set at the desired 3-5% where the interest rates would be determined. The some functions of the RBA include:
1. Controlling the amount of money being produced and distributed
2. Conducting monetary policies
3. Banker to commercial banks made through Exchange Settlement Accounts (ESA)
4. Being both a banker and adviser to the Commonwealth government.
In figure 1, the supply of cash is determined by the RBA due to the monopoly control over the money in the cash market. A decrease in the supply of money would cause the cash rate to maximize and an increase in the supply of money would cause the cash rate to decline. The only time the supply of cash would change is when a payment from the RBA is made to a commercial bank’s ESA (exchange settlement account) or that a commercial bank makes a payment to the RBA. With this method, both injections and leakages are made through the cash markets in order to maintain the cash rate a specific target level.
The demand of cash is made by the amount of cash in the cash market in the ESA left with the RBA. The funds in the ESA are transacted between both parties: the RBA and the commercial banks. However, it is required by the RBA for the money in the accounts not to be overdrawn, this way in a crisis there is cash roaming around in the markets.
Through market operations, the RBA can control the ongoing volumes of cash. With the RBA purchasing Government Securities (CGS), the supply of cash would be further increased. Another method with the control of the cash would be the RBA selling the CGS to the commercial banks who would in turn would withdraw money from

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