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Submit the answers to the following questions in the unit 9 drop box. You must explain your answer and provide your supporting computations. Yes/No answers or simple numbers are not acceptable and will not receive full credit.
1. If a central bank buys government bonds, what happens to interest rates, aggregate demand, and GDP? What happens to these variables if it engages in contractionary monetary policy through open market operations?
2. If a central bank wants to support the value of its currency by purchasing it with its FX reserves, what happens to the monetary base and the money supply if this action is nonsterilized?
3. If buying domestic currency with FX reduces the amount of a central banks currency in FX markets and the central bank wants to offset this effect by increasing the domestic money supply and thus sterilize the intervention, what open market operations (or domestic credit actions) are appropriate? Explain.
4. What are a central banks policy tools for changing the money supply and how does each of them work? Which one effects the money multiplier?
5. What does the monetary base equal in terms of assets and liabilities? What are some of the broader monetary aggregates that represent the “money supply”?
6. Is a sterilized FX intervention more effective than a nonsterilized FX intervention? Explain.
7. Assume the Fed is currently trying to reduce domestic unemployment and the trade deficit. What must happen to interest rates and the FX value of the dollar in order to accomplish these goals. Is the appropriate monetary policy expansionary or contractionary?
8. How is the money supply curve related to the a central banks objective of full employment and economic stability?
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