1 Reverse Repurchase Agreements

On 3 February 2020, China's central bank, the People's Bank of China (PBOC), conducted the largest single-day reverse repo operation in its his- tory. The PBOC injected a total of 173.81 billion USD into the money mar- kets through reverse bond repurchase agreements, which is the purchase of bonds with the agreement to sell them at a higher price at a specific future date. Use a diagram showing the exchange rate, the expected currency re- turns, and money holdings to describe the short-term and long-term effects (i.e., flexible prices) of this monetary policy action from the perspective of the United States. That is, let USD be the domestic currency and CNY be the foreign currency (10 Points).