Initially the central bank balance sheet at Home is the following. Money supply is 40 pesos (M = 40), the stock of local bonds is 20 (B = 20), and the foreign reserves are 20 dollars (R = 20). As in classes, the exchange rate is fixed and equal to one (E = 1).

(a) Show this balance sheet using a graphical representation as in class.

(b) Suppose the stock of local bonds at home increases by 20%. Describe the type of operation the central bank has to do in order to keep the exchange rate fixed.

(c) Show the new central bank balance sheet using a figure like the one used in part (a).

(d) If the stock of local bonds increases by 150% when compared to part (a), will the central bank be able to defend its peg? Explain.