Economics, Assignment #8

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Question description

1.  Suppose the Federal Reserve (district bank) extends a discount loan of $1000 to a bank.    Provide the bank’s balance sheet and the Federal Reserve (district bank) balance sheet as   a result of this transaction (2 points).

2.  The Federal Reserve periodically intervenes in the foreign exchange market in order to stop undesired exchange rate movements.  If the exchange rate is decreasing, for example, they will use some of their foreign currency holdings to buy dollars, then destroy the dollars.  Show the effect of intervention in this way on the Fed's balance sheet.  If the Fed does nothing else, how will this move ultimately affect M2?  Based upon the definition, explain what is meant in this context by sterilized intervention.  Providing another balance sheet for the Fed, show the effect of sterilized intervention  (4 points).

3.  When the European Union, an economic bonding of major European countries, was established, they needed to institute a Central bank for the entire union.  They chose to structure it after the US Federal Reserve, despite questions regarding the independence.  Name two reasons why they arrived at this decision (2 points).

4.  Suppose that the news reports that the Fed conducted a series of bond sales this past week.  Provide two possible reasons for this move.  Use the term expansionary or contractionary -- whichever is appropriate -- in your answer (2 points).

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