Fed Balance Sheet 3000000 Fed Agency Debt Mortgage-Backed Securities Purch Liquidity to Key Credit Markets 2500000 Lending to Financial Institutions Long Term Treasury Purchases Traditional Security Holdings 2000000 Millions 1500000 1000000 500000 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Source: Cleveland Fed a) (10 points) We discussed the concepts of sterilization and unlimited balance sheet capacity. On the graphic above, locate (mark on the graphic) the period of sterilization and explain exactly what sterilization is and why and under what conditions, central banks practice sterilization. Why was the Fed practicing sterilization during this period and what exactly was the concern about this sterilized intervention? (more room next page) YOU CAN ANSWER THIS b) (10 points) The Fed pleaded with Congress to push up the date in which the Fed would be granted the authority to pay interest on reserves. Why was the Fed pleading for this authority, when did they get the authority, and what did they do as soon as they got the authority? Please mark on your diagram the date that the Fed received this authority. Finish your essay by answering the following questions: What exactly does 'unlimited balance sheet capacity' mean? What happened to excess reserves and the money multiplier as soon as the Fed was granted the authority to pay interest on reserves? Please use an expression for the money multiplier to support your answer. YOU CAN ANSWER THIS