Influence of Cash Rate in Interest Rates of the Economy

The Cash Rate
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Question 1
The cash rate or the policy interest rate influences all other interest rates in the economy to varying levels. The rate is the amount charged on overnight loans by the central bank and other financial institutions. It forms the foundation on which the structure of interest rates in the economy is developed. Any change in the monetary policy means an alteration in the cash rate’s operating target and, as a result, causes a shift in the structure of interest rates in the current financial system. The policy affects the behavior of both the lenders and borrowers in the financial sector. It sets the interest rate that an institution charges its customers on their loan product. When the cash rate is low, interest rates on other loans go down and, thus, banks can lend (Stevens, 2016).
Interest rates affect the exchange rate. As a result, this affects the relative demand for locally-produced goods as well as the net exports. The cash rate influences the demand shock, which is an unanticipated change in cumulative demand. Governments can use both the monetary policy or the fiscal policy in stabilizing the economy. Low-interest rates support domestic demand as well as a lower exchange rate, and this supports the trade industry. Additionally, low exchange rates make exports relatively affordable (RBA, 2020).
A change in the cash rate affects the market interest rates. Low-interest rates stimulate spending, primarily through investments. When the cash rate is low, the interest rates of mortgages will be less, and thus, properties will be affordable as individuals will be paying less interest every month on the money they have borrowed. Low-interest rates result in higher inflation, which reduces the actual value of debts.
Question 2
Lower interest rates have several adverse effects. For instance, when the rate lowers, the prices of assets escalate. As a result, people who own assets will be wealthier. Minimal rates also result in lower demand for government bonds, a fall in demand for locally-produced goods, ...