1. The Federal Reserve purchases $1,000,000 of foreign assets for $1,000,000. Sh
ID: 2748968 • Letter: 1
Question
1. The Federal Reserve purchases $1,000,000 of foreign assets for $1,000,000. Show the effect of this open market operation using T-accounts.
2. Again, the Federal Reserve purchases $1,000,000 of foreign assets. However, to raise the funds, the trading desk sells $1,000,000 in T-bills. Show the effect of this open market operation using T-accounts.
5. If the balance in the current account increases by $2 billion while the capital account is off $3.5 billion, what is the impact on governmental international reserves?
Explanation / Answer
1)
Federal Reserve System
Assets
Liabilities
Foreign assets
+$1 million
Currency in circulation
+$1 million
(international reserves)
2)
Federal Reserve System
Assets
Liabilities
Foreign assets
+$1 million
Currency in circulation
0
(international reserves)
Government bonds
-$1 million
3) The governmental international reserves is equal to the current account plus the capital account. Thus the change in international reserves must be $2bn-$3.5bn = -1.5bn.
Federal Reserve System
Assets
Liabilities
Foreign assets
+$1 million
Currency in circulation
+$1 million
(international reserves)
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