Question

quzlet Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base. Question 30 options: A) a decrease; an increase B) an increase; a decrease C) a decrease; a decrease D) an increase; an increase

Answer 1

Answer:

D) an increase; an increase

Answer 2

Answer:

D) an increase; an increase

• Everything else held constant, this transaction will cause AN INCREASE in the foreign assets held by the Federal Reserve and AN INCREASE in the U.S. monetary base.

Explanation:

Since Japanese banks are buying US dollars with Japanese yens, the total amount of foreign currency held by the Federal Reserve will increase ⇒ it will basically hold more yens.

Since the monetary base is defined as the total amount of money circulating in the economy + money held by commercial banks in their own vaults + reserves held by the Fed, an increase in foreign currencies held by the FED will increase the monetary base.