Question
The Federal Reserve provided multiple indications Wednesday that its run of ultra-easy policy since the beginning of the Covid pandemic is coming to a close,
The Federal Reserve provided multiple indications Wednesday that its run of ultra-easy policy since the beginning of the Covid pandemic is coming to a close, making aggressive policy moves in response to rising inflation. For one, the central bank said it will accelerate the reduction of its monthly bond purchases. The Fed will be buying $60 billion of bonds each month starting in January, half the level prior to the November taper and $30 billion less than it had been buying in December. The Fed was tapering by $15 billion a month in November, doubled that in December, then will accelerate the reduction further come 2022. (Source: https://www.cnbc.com/2021/12/15/fed-will-aggressively-dial-back-itsmonthly-bond-buying-sees-three-rate-hikes-next-year.html, accessed on 4/1/2022) Despite the Fed will reduce its bond purchase, according to economic theory, explain how would the Fed purchase of bonds affect the monetary base? You may use the T-account in your illustration. [6 marks]
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