“The European Central Bank will step up efforts to contain borrowing costs that have surged amid brighter prospects for the U.S. economy and a relaxed stance from the Federal Reserve, aiming to shore up the flagging eurozone economy….

At a news conference Thursday, President Christine Lagarde said the ECB would seek to counter a recent increase in bond yields, part of which she said reflected higher growth expectations in the U.S. rather than a recovery in Europe. Very high debt levels in some European countries—particularly in the south, where debt is more than 150% of gross domestic product—leave the eurozone especially vulnerable to rising borrowing costs.

To contain yields, the ECB will significantly accelerate purchases under a €1.85 trillion bondbuying program, equivalent to $2.2 trillion, unveiled a year ago.

1. Using a well-labelled diagram and assuming other things being equal, illustrate the effects of the bond-buying program (accelerated purchases) on the interbank interest rate and supply of reserve in the European interbank market.  
2. Explain briefly the expected effects of this bond-buying program on the interest rates of bank loans extended by European banks.  
3. Suggest TWO factors that may limit the effectiveness of this program in generating sufficient liquidity to prop up the sluggish economy.
4. Explain briefly how the discount loans in Hong Kong are backed up by US dollar assets.