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https://www.federalreserve.gov/newsevents/speech/clarida20200521a.htm

1.This question is based on a speech,U.S. Economic Outlook and Monetary Policy, by the Fed Vice Chair Richard H. Clarida on May 21, 2020, at the New York Association for Business Economics. In that speech, Richard Clarida first lays out the economic outlook at the time and then discusses the Fed's policy responses to the situation.

(a)In his speech, Clarida points out that while economic situation seemed dire at the time, financial conditions had improved considerably after mid-March. What was his explanation for this contrast between economic and financial circumstances? [6]

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(b)In his speech, Clarida mentioned a number of policy measures that the Fed had taken to reduce the economic and financial impact of the COVID-19 pandemic. Which measures that he mentioned were conventional and which ones were unconventional? [12]

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2.China has a trade surplus and the People's Bank of China (PBC, China's central bank) purchases all the excess foreign currency earning of the country's exporters. This policy is equivalent to bond purchases by the PBC through open market operations.

(a)What is the impact of the PBC's policy of foreign currency purchase on the country's money supply? [7]

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(b)If all foreign conditions are exogenous and the aggregate real income, the price level, and the future conditions of the Chinese economy (including the expected exchange rate) can be taken as given, what is the consequence of the policy for the current interest rate and the spot exchange rate in China? [10]

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