Depository institutions (DIs) play an important role in the transmission of monetary policy from the central bank (Reserve Bank of Australia) to the rest of the economy primarily because:[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Depository institutions create and hold the bulk of transaction balances (deposits), so changes in central bank policy that affect bank reserves and interest rates quickly alter the quantity and cost of those deposits — hence they are the main channel for monetary transmission.

1. Relevant knowledge points and concepts
- Money supply (broad measures like M1/M2) is largely composed of bank deposits plus currency.
- Depository institutions (DIs) accept deposits and make loans; fractional-reserve banking allows banks to expand deposits through lending.
- The central bank changes policy via interest rates, open-market operations, or reserve requirements, which affect banks’ reserves and lending behavior, and therefore the deposit component of money supply.
- Money multiplier concept: ΔDeposits ≈ (1/required reserve ratio) × ΔReserves (illustrative).

2. Step-by-step reasoning
- The RBA alters policy (e.g., raises/lowers the cash rate or buys/sells securities), which changes the reserves available to DIs and the market interest rate.
- DIs respond by changing lending and deposit rates and the quantity of loans they make.
- When banks lend, recipients typically receive deposits (in their accounts), increasing the measured money supply. Conversely, reduced lending shrinks deposit balances.
- Because deposits are a major part of measured money, these deposit changes transmit the RBA’s policy to spending and investment in the economy.

3. Calculations / intermediate steps (illustrative)
- If required reserve ratio = 10% (0.10), money multiplier ≈ 1/0.10 = 10.
- A $1 million increase in reserves could support up to ≈ $10 million in new deposits (loans), showing how a small change in reserves/policy can cause a much larger change in deposit-based money.

4. Why the correct answer is correct
- Option (a) states DI deposits are a major portion of the money supply. Because monetary policy primarily influences bank reserves and interest rates, and banks’ deposits constitute most of money measured (M1/M2), the policy effects pass mainly through changes in DI deposits. That is the central mechanism by which the RBA’s actions affect aggregate demand.

5. Why other options are incorrect
- (b) Loans to corporations themselves are not directly a component of the money supply; it is deposits that count. Loans can create deposits, but the statement is misleading as the primary monetary aggregate is deposits/currency.
- (c) While DIs do provide substantial housing credit, that channel (mortgage lending) is only one distributional effect; the primary reason for transmission is the size of deposits in the money supply, not solely residential credit.
- (d) Regulation of bank loans is true to some extent but is not the primary reason monetary policy is transmitted — regulation does not explain why central bank actions change the economy via money supply.

6. Conclusion / confirmation
- Therefore the correct answer is (a) DI deposits are a major portion of the money supply, which matches the provided answer.

Depository institutions (DIs) play an important role in the transmission of monetary policy from the central bank (Reserve Bank of Australia) to the rest of the economy primarily because:[Fill in the blank]单项选择题

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