What will eventually happen to the central bank''s reserves

Assignment Help Econometrics

Reference no: EM131204769

Suppose that a country's money supply is $1,200 million and its domestic credit is equal to $800 million in the year 2005. The country maintains a fixed exchange rate, the central bank monetizes any government budget deficit, and prices are sticky.

a. Compute total reserves for the year 2005. Illustrate this situation on a central bank balance sheet diagram.

b. Now, suppose the government unexpectedly runs a $100 million deficit in the year 2006 and the money supply is unchanged. Illustrate this change on your diagram. What is the new level of reserves?

c. If the deficit is unexpected, will the central bank be able to defend the fixed exchange rate?

d. Suppose the government runs a deficit of $100 million each year from this point forward. What will eventually happen to the central bank's reserves?

e. In what year will the central bank be forced to abandon its exchange rate peg and why? f. What if the future deficits are anticipated? How does your answer to part (e) change? Explain briefly.

Reference no: EM131204769

Questions Cloud

What happens to riqueza''s foreign exchange reserves : How will the change above affect the central bank's ability to defend the fixed exchange rate? What is the backing ratio now? Describe how this situation differs from one in which the central bank buys government bonds, as in part (b).

Different types of purchasing decisions : How do the three different types of purchasing decisions (straight rebuy, modified rebuy, new task) influence the time and effort a buyer might allocate to the different steps of the purchase decision process?

What is a lender of last resort and what does it do : What is a lender of last resort and what does it do? If a central bank acts as a lender of last resort under a fixed exchange rate regime, why are reserves at risk?

Steps in writing an effective statement of the problem : 1. Discuss the Steps in writing an effective statement of the problem 2. Challenges faced in articulating the research problem

What will eventually happen to the central bank''s reserves : In what year will the central bank be forced to abandon its exchange rate peg and why? f. What if the future deficits are anticipated? How does your answer to part (e) change? Explain briefly.

Identify one member of congress : Congressional Ethics. Identify one (1) member of Congress who has been charged with ethics violations. Briefly discuss the reason for the charges and provide two (2) reasons why you agree or disagree with the verdict and any penalties. Provide exa..

Internal recruiting and external recruiting : What do you consider advantages and disadvantages of internal recruiting and external recruiting? Employees often have negative views on the policy of hiring outsiders rather than promoting from within.

Compare and contrast the eurozone and the united states : One could view the United States as a currency union of 50 states. Compare and contrast the Eurozone and the United States in terms of the optimum currency area (OCA) criteria.

What are the greatest potential benefits : discuss the OCA criteria for this group of countries. What are the greatest potential benefits? What are the potential costs?

User Account

All Pages