Consider an open economy in which the central bank targets the interest rate. Fill in the blanks
in the following statement using the options below: If the central bank sells domestic currency
in the foreign exchange market then, ceteris paribus, unless it carries out open market ___ of
government securities the equilibrium budget surplus will ___.
A) (purchases, rise).
B) (purchases, fall).
C) (sales, fall).
D) (sales, rise).
Consider an open economy in which the central bank targets the interest rate. Fill in the blanks
in the following statement using the options below: Decreased public confidence in the
security of bank deposits will, ceteris paribus, cause equilibrium net exports to ___ if the central
bank chooses not to undertake open market ___ of government securities.
A) (rise, purchases).
B) (rise, sales).
C) (fall, purchases).
D) (fall, sales).
In the first statement, we are considering an open economy where the central bank targets the interest rate. The central bank's action stated in the blank is "sells domestic currency in the foreign exchange market."
To determine the impact on the equilibrium budget surplus, we need to understand the relationship between the central bank's action and open market operations (OMO) of government securities.
Open market operations involve the buying or selling of government securities by the central bank. The purpose of performing open market operations is to affect the money supply and interest rates in the economy.
In this case, the statement mentions that unless the central bank carries out open market ______, the equilibrium budget surplus will _____.
Now, consider the impact of the central bank selling domestic currency. This action will decrease the supply of domestic currency in the foreign exchange market, leading to an increase in its value relative to foreign currencies. This, in turn, will result in a decrease in the interest rate.
To maintain the targeted interest rate, the central bank needs to counteract the decrease in the interest rate caused by selling the domestic currency. And the way to do this is by carrying out open market ______.
Given the available options, we can now identify the correct choices:
If the central bank sells domestic currency in the foreign exchange market then, ceteris paribus, unless it carries out open market ___ of government securities the equilibrium budget surplus will ___.
A) (purchases, rise).
B) (purchases, fall).
C) (sales, fall).
D) (sales, rise).
Based on the explanation provided, the correct answers would be:
If the central bank sells domestic currency in the foreign exchange market then, ceteris paribus, unless it carries out open market sales of government securities the equilibrium budget surplus will rise. (Option D)
Moving on to the second statement, we are considering an open economy where the central bank targets the interest rate. The statement mentions the scenario of decreased public confidence in the security of bank deposits.
To understand the impact on equilibrium net exports and the role of the central bank in this situation, we need to determine the appropriate choices for the open market ______ of government securities.
From the statement, we can infer that decreased public confidence in the security of bank deposits will affect some other variable that, in turn, impacts equilibrium net exports.
Given the available options, we can now identify the correct choices:
Decreased public confidence in the security of bank deposits will, ceteris paribus, cause equilibrium net exports to ___ if the central bank chooses not to undertake open market ___ of government securities.
A) (rise, purchases).
B) (rise, sales).
C) (fall, purchases).
D) (fall, sales).
Based on the explanation provided, the correct answers would be:
Decreased public confidence in the security of bank deposits will, ceteris paribus, cause equilibrium net exports to fall if the central bank chooses not to undertake open market sales of government securities. (Option D)