Economics Past Paper Question

[HSC student]

Hello,
Would someone be able to assist me with this question please...
Could they also please explain why this is so!

What would be the most likely effect of the Reserve Bank of Australia purchasing second hand Commonwealth Government Securities.
a) A decrease in liquidity of exchange settlement funds and a decrease in interest rates.
b) An increase in liquidity of exchange settlement funds and a decrease in interest rates.
c) A decrease in liquidity of exchange settlement funds and an increase in interest rates.
d) An increase in liquidity of exchange settlement funds and an increase in interest rates.

[emilyyyyyyy]

im sorry this is so late but the answer's B.
So bc the Gov is purchasing securities, think of it like this: so the gov is purchasing securities from the banks in the short term money market, and bc purchasing means giving the banks money for such securities, there will be an increase in the money supply in the banks' accounts = increased liquidity.
Then bc there is an increase in the money supply in the banks' ES account, there is less competition amongst the banks, meaning that they don't need to increase their interest rates to maintain profits - instead, they decrease their interest rates.

hope this makes sense