The following are a complete list of the assets and the liabilities of a central bank lets call the central bank The Reserve Bank.

Net foreign currency reserves (and gold) $70bn

Currency at issue and bank vault money $90bn

Other assets $30bn

Government balance $40bn

Balances held at the central bank by foreign central banks and others $3bn

Outstanding loans to banks and others $1bn

Exchange settlement balances $85bn

Other liabilities $28bn

Government and other securities $160bn

1) Suppose the Reserve Bank pays a dividend of $15bn to the Federal Government. How does this affect the balance sheet of the Federal Reserve? Which item or items change, and by how much? (2 marks)

2) The central bank sells $20bn worth of government bonds to the Bank of Mellon, which is a private bank. How does this affect the balance sheet of the Reserve Bank? Which item or items change, and by how much? (2 marks)

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