Suppose that a countrys money supply is $1,200 million and its domestic credit is equal to $800 million in the year 2005 The country maintains a fixed exchange rate, the central bank monetizes any government budget deficit, and prices are sticky a Compute total reserves for the year 2005 Illustrate...

a M 1200 and B 800 Therefore R 400 b The deficit is financed through the central bank buying governm ...

Suppose that a countrys money supply is $1,200 million and its domestic credit is equal to $800

Question:

Suppose that a country’s money supply is $1,200 million and its domestic credit is equal to $800 million in the year 2005. The country maintains a fixed the central bank monetizes any government budget deficit, and prices are sticky.
a. Compute total reserves for the year 2005. Illustrate this situation on a central bank diagram.
b. Now, suppose the government unexpectedly runs a $100 million deficit in the year 2006 and the money supply is unchanged. Illustrate this change on your diagram. What is the new level of reserves?
c. If the deficit is unexpected, will the central bank be able to defend the fixed Suppose the government runs a deficit of $100 million each year from this point forward. What will eventually happen to the central bank’s reserves?
e. In what year will the central bank be forced to abandon its peg and why?
f. What if the future deficits are anticipated? How does your answer to (e) change? Explain briefly.
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...