ECON

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ECON 442 Assignment 3 (due Nov 4) Please write your answers in the space provided below. Use Figures where necessary to explain your answers. (50 Points) (8) A balance sheet for a central bank of is shown below Central Bank Balance Sheet Assets Liabilities Foreign assets 2,000 Deposits held by private banks 1500 Domestic assets 3,500 Currency in circulation 4,000 The central bank of a country with a fixed exchange rate buys 500 worth of foreign bonds. What kind of external balance would be most likely to prompt such an action by the bank Write the new balance sheet of the central bank. What happens to the money supply as a result of this action What should the bank do to sterilize this effect on the money supply Write the new balance sheet after the central bank undertakes this sterilization action. ( 12) a. Draw a figure (showing the money market and foreign exchange market) illustrating the actions the central bank must take to maintain a fixed exchange rate following an increase in output. b. Explain why sterilization of the Central Banks intervention (in part a) would make it impossible for the Central Bank to maintain a fixed exchange rate. http//intl.econ.cuhk.edu.hk/topic/index.phpdid9 c. Show how an expected devaluation (under a fixed exchange rate) could lead to a balance of payments crisis. Please explain with the aid of a figure. (16) a. Use the DD-AA model to examine and compare the response of an economy under fixed and floating exchange rate to a temporary fall in foreign demand for its exports HYPERLINK https//www.google.com/searchqUsetheDD-AAmodeltoexamineandcomparetheresponseofaneconomyunderfixedan- dfloatingexchangeratetoatemporaryfallinforeigndemandforitsex- portsoqUsetheDD-AAmodeltoexamineandcomparetheresponseof https//www.google.com/searchqUsetheDD-AAmodeltoexamineandcomparetheresponseofaneconomyunderfixedan-
dfloatingexchangeratetoatemporaryfallinforeigndemandforitsex-

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