Part D and E A.Show Riqueza's central bank balance sheet, assuming there are no private banks. What isthe backing ratio?B.Suppose that Riqueza's central bank buys 400 million escudos in government bonds.Show how this affects the central bank balance sheet. Does this change affect Riqueza'smoney supply? Explain why or why not. What is the backing ratio now?C.Now, starting from this new position, suppose that there is an economic downturn inRiqueza, so that real income contracts by 10%. How will this affect money demand inRiqueza? How will forex traders respond to this change? Explain the responses in themoney market and the forex market.D.Using a new balance sheet, show how the change described in part (c) affects Riqueza'scentral bank. What happens to domestic credit? What happens to Riqueza's foreignexchange reserves? Explain the responses in the money market and the forex market.E.How will the change above affect the central bank's ability to defend the fixed exchangerate? What is the backing ratio now? Describe how this situation differs from one in whichthe central bank buys government bonds, as in part (b). Practice Question 2:Consider the central bank balance sheet for the country of Riqueza. Riqueza currentlyhas 2,000 million escudos in its money supply, 1,200 million escudos of which isbacked by domestic government bonds; the rest is backed by foreign exchange reserves.Assume that Riqueza maintains a fixed exchange rate of one escudo per dollar, theforeign interest rate remains unchanged, and money demand takes the usualform, M/P = L(i)Y. Assume prices are sticky.

Current Money Supply = 2000 million 1200 million backed by government bonds 800 million backed by…

Practice Question 2: Consider the central bank balance sheet for the country of Riqueza. Riqueza current has 2,000 million escudos in its money supply, 1,200 million escudos of which backed by domestic government bonds; the rest is backed by foreign exchange reserve Assume that Riqueza maintains a fixed exchange rate of one escudo per dollar, th foreign interest rate remains unchanged, and money demand takes the usua form n

Practice Question 2: Consider the central bank balance sheet for the country of Riqueza. Riqueza current has 2,000 million escudos in its money supply, 1,200 million escudos of which backed by domestic government bonds; the rest is backed by foreign exchange reserve Assume that Riqueza maintains a fixed exchange rate of one escudo per dollar, th foreign interest rate remains unchanged, and money demand takes the usua form n

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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