Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and,instead,holds more dollars on deposit at the Federal Reserve. Everything else held constant,a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States.

Question

Quizplus · Accepted Answer

When the Bank of China decreases its purchases of U.S. government bonds and holds more dollars on deposit at the Federal Reserve, it effectively reduces the amount of money circulating in the U.S. economy, leading to a decrease in the monetary base. To offset this decrease and stabilize the monetary base, the Federal Reserve would need to conduct open market purchases of U.S. government bonds, injecting more money into the economy.

Suppose the Bank of China Permanently Decreases Its Purchases of U.S