PS #4_ans_wi2017_1 - Econ171 Dongwon Lee Econ171...

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Econ171 Dongwon Lee 1 Econ171 International Finance PS #4 Answers I. Central Bank Intervention and the Money Supply Assets Liabilities Foreign assets $900 Domestic assets $1,500 Deposits held by private banks $400 Currency in circulation $2,000 The central bank’s foreign assets drop, and consequently liabilities must drop too. In this case though, currency has not changed, but after the check clears, the issuing bank has $100 less held as a deposit at the central bank. II. Fiscal Expansion under a Fixed Exchange Rate By raising output, fiscal expansion raises imports and thus worsens the current account balance. Fiscal expansion tends to cause an increase in domestic output (or income) and currency appreciation under floating (flexible exchange rate regime), both of which push the current account towards deficit. On the other hand, fiscal expansion tends to increase only domestic output (or income) under peg (fixed exchange rate regime) but by a larger size than floating (because of monetary accommodation), which again lowers current account. When we compare
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