If the Federal Reserve decides to sterilize the foreign exchange market intervention described in given Problem, show the impact on the Fed's balance sheet. What would the overall impact be on the monetary base? What would be the impact, if any, on the exchange rate? You should assume that the intervention took place in a deep, well-functioning foreign exchange market.
Problem
Show the impact on the Federal Reserve's balance sheet of a foreign exchange market intervention where the Fed sells $1,000 worth of foreign exchange reserves. Explain what impact, if any, the intervention will have on the domestic money supply.