1. In pursuit of anti-ination policy in the 19905, the Open Market Committee of the Federal Reserve decided to sell government seCurities. The Fed sold $100,000 of government securities; the noncommercial-bank public purchased them, making payment by checks that were cleared through the Fed. Show the immediate changes in the balance sheets of each group involved: the Fed, the commercial banks, and the public. Explain why selling government seCurities might be anti-inationary? 2. Money Creation and the Banking System. Indicate which of the following statements are true and which false. Explain. a. The purchase of government securities by the Fed from the public will begin a contraction in commercial bank credit. b. If there is a decrease in market rates of interest, there will be a decrease also in the prices of govemment securities. c. If money is to remain generally acceptable as a medium of exchange and act as a unit of account and store of value, it must consist of something that is useful and desirable for its own sake. d. If a bank is "loaned up," this means its loans equal its deposits. e. Generally, a decrease in the cash reserves of the commercial banks could force a contraction of money and credit, but an increase in cash reserves cannot force the banks to expand money and credit. 3. Since about 2009, the Federal Reserve has changed the way they implement monetary policy. One of their main tools is raising and lowering the interest rate paid on bank reserves. Briey, how does raising the interest rate the Fed pays on bank reserves affect market rates of interest? 4. There are only two currencies in the world, the Transylvanian pound and the Boguslavian bogo. Explain what happens to the bogo in each of the following scenarios (reminder: use the appropriate terms; saying the \"bogo goes up" or \"the bogo goes down" is not correct). You may assume that the exchange rate is exible unless otherwise stated. a. Transylvanians flock to Boguslavia to hear the new music sensation, Vladie and the Chipmunks. b. Boguslavian beef is tainted with mad cow disease. c. Boguslavia changes its official (fixed) exchange rate (i.e., parity) from 5 bogos per Transylvania pound to 6 bogos per Transylvanian pound. d. Boguslavia changes its official (fixed) exchange rate (i.e., parity) from 5 bogos per Transylvania pound to 3 bogos per Transylvanian pound. e. The Bank of Transylvania conducts contractionary monetary policy. 5. In a neat and carefully labeled supply-demand diagram, illustrate what happens in the market for bogos in question (1b) above. 6. This is a hard question. We have not discussed this explicitly in class (and it will not be on the exam), so if you are unable to do it, it will not affect your grade on the problem set. However, if you are looking for a challenge, see if you can figure it out. Suppose in the foreign exchange market that the following exchange rates hold: f1 = $2.00 f = British pound sterling V1 = $0.20 Y = yen f1 = Y12 $ = US dollar How could you make a profit in this situation? Assuming flexible exchange rates, what would happen if enough people figured out how to make a profit? What would happen if exchange rates were fixed