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