3. Show the impact on the Federal Reserves balance sheet of a foreign-exchange market intervention where the Fed buys $1,000 worth of foreign exchange reserves.

a. Explain what impact, if any, the intervention will have on the domestic money supply. Show the impact on the Feds balance sheet.

b. If the Federal Reserve decides to sterilize the foreign-exchange market intervention described above, show the impact on the Feds 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.)