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University of Toronto Scarborough
Economics for Management Studies
Iris Wu

ECMC61Chapter 18 Review Questions Answer KeyQuestion 1 Problems 1Suppose central bank purchases DA DACBDA MS R CBeEERREHolding other things constantor RRhome experiences capital outflowsDC is under pressure to depreciate because of excess supply of DC at the official exchange rateTo prevent DC from depreciating central bank has to buys DC and sells FC in the foreign exchange market until RR or until E returns to the official levelWhen central bank buys DC MSback to its original levelWhen central banks sell FC its holding of FA decreases the reduction in FACBCBthe increase in DAoverall there is no change in central banks assets but the composition of assets changesSince there is no change in central banks assets its liabilities remain unchanged and there is no change in MSRegarding to the BOP accounts when there are capital outflows there will be a debit entry in nonreserve KA nonreserve KA deficitThis debit entry is offset by a credit entry in ORT because central bank sells FC1
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