This contributed to the contraction of the economy

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This contributed to the contraction of the economy. Analytical Problems 11. Suppose you examine the central bank’s balance sheet and observe that since the previous day, reserves had fallen by $100 million. In addition, on the asset side of the central bank’s balance sheet, securities had fallen by $100 million. What activity might the central bank have carry out earlier in the day to lead to these changes in the balance sheet? Answer: The central bank may have conducted an open market sale of $100 million with a commercial bank. The sale of the securities would involve $100 of securities being removed from the central bank’s balance sheet. The commercial bank would have paid for the securities from its reserve account, thus leading to a fall of $100 in reserves on the central bank balance sheet. 12. Do you think the central bank was aiming to increase, decrease or maintain the size do the money supply by carrying out the changes described to its balance sheet in question 11? Explain your answer.
13. Looking again at the situation described in question 11 do you think the size of the banking system’s balance sheet would be affected by these changes to the central bank’s balance sheet? Explain your answer. 14. *In carrying out open market operations, the Federal Reserve buys and sells U.S. Treasury securities. Suppose the U.S. government paid off all its debt. Could the Federal Reserve continue to carry out open market operations? 15. Suppose you observe a rise of $100 in reserves on the liability side of the central bank’s balance sheet with all other liabilities remaining unchanged. On the asset side, the entries under “securities” and “loans” remained unchanged. What might have accounted for the change in reserves and how would this action be reflected on the central bank’s balance sheet? Answer: The most likely scenario is that the rise in reserves reflects a foreign- exchange market intervention by the central bank where it buys $100 million worth of bonds denominated in foreign currency from a commercial bank. The payment for the bonds would be credited to the commercial bank’s reserve account, thus explaining the observed increase in reserves. On the liability side of the central bank’s balance sheet, foreign exchange reserves would rise by $100 million.

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