During the Covid-19 pandemic, the RBA implemented a quantitative easing policy by buying Treasury bonds from the secondary market, resulting in a large expansion of its balance sheet. The bonds are recorded at market value in its balance sheet.

Answer the following questions, using exclusively the knowledge and tools acquired in the course.

(a) Using the diagrams above, analyze the effects of the quantitative easing policy on the magnitude and the composition of the monetary base. Clearly explain the driving mechanisms.

(1 mark)

(b) Identify whether the government policy of generous financial support to businesses and households during COVID-19 lockdown could have contributed to the changes of M0 as well.

(1 mark)

(c) Since May 2022 the RBA has been rapidly increasing its cash rate target. Analyze how the increase in the cash rate target combined with the large size of the RBA assets and liabilities could bring a loss in the RBA income expense statement.

RBA Assets Monthly RBA Liabilities RBA Assets Monthly RBA Liabilities