Describe the type of operation the central bank

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Initially the central bank balance sheet at Home is the following. Money supply is 40 pesos (M=40), the stock of local bonds is 20 (B=20), and the foreign reserves are 20 dollars (R=20). As in classes, the exchange rate is ?xed and equal to one (E=1).

a.) Show this balance sheet using a graphical representation as in class. Suppose the stock of local bonds (B) at home increases by 20%.

b.) Describe the type of operation the central bank has to do in order to keep the exchange rate ?xed.

Reference no: EM133126448

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