Question
The central bank balance sheet of the imaginary country Pecunia is shown below: Assets Liabilities Foreign assets $1,000 Domestic assets $1,500 Deposits held by private
The central bank balance sheet of the imaginary country Pecunia is shown below:
Assets Liabilities
Foreign assets $1,000 Domestic assets $1,500
Deposits held by private banks $500 Currency in circulation $2,000
We want to analyze how the sale of $100 worth of its foreign assets affects the central bank's balance sheet. The assumption in the textbook example was that the buyer of the foreign assets paid in the form of domestic currency cash. Suppose instead that the buyer pays with a check drawn on her account at Pecuniacorp, a private domestic bank. Using a balance sheet like the one presented above, show how the transaction affects the central bank's balance sheet and the money supply.
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