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
?
a) 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 to prompt such an action by the bank?
b) Write the new balance sheet of the central bank.
c) 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
d) Write the new balance sheet after the central bank undertakes this sterilization action.