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Note: for this assignment, referencing is not crucial as you will mainly using the Module 9 material and the textbook (Ch. 13). Nevertheless, it is still good academic practice to reference regardless.

1. Consider the scenario, in which the Federal Government - with its more visionary leadership - decides to inject $20 billion into the higher education and health sectors in Australia, via additional Treasury spending. For this exercise assume all other things are equal (ceteris paribus). (Each subquestion requires only 2 to 4 good sentences. Use balance sheets to support your answer, where appropriate.)

 a)   Explain why this will lead to an increase  in non-Government sector deposits in the Retail Banks and an increase in Retail Bank reserves at the RBA, ceteris paribus.

b)   Ceteris paribus, what effect does this Treasury spending have on the stock of high powered money and total net financial assets held by the non-Government sector?

c)   Why is it likely that there would be downward pressure on the (market-determined) interbank rate?

d)   How low could the interbank rate fall?  

e)   Explain the nature of the Open Market Operations enacted by the Reserve Bank to address the falling interbank rate as described above. 

f)    Would it be necessary to conduct OMO, if the support and target rates were equal?

1. If Treasurers are not supposed to be judged on their competence as economic managers in sovereign economies on the basis of the budgetary outcome, what criteria should be used to assess their performance? (100 words)