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Monetary policy thru buying and selling foreign securities

Here is part of the problem: You want to end the training by focusing on how governments (via central banks) impact economies around the world when they engage in buying and selling foreign securities. One area of interest is how the US is influenced by actions taken by central banks in Asia and Europe. You think the best way to address this topic is to use an example of how the People's Bank of China (China's central bank) would impact the US if it was to purchase US$50 billion in US treasury securities.

Draft a memo explaining how this transaction would impact the US.

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Virtually all central banks carry out monetary policy operations by influencing--in effect setting--some short-term nominal interest rate, typically the rate on overnight inter-bank loans. The FOMC (US) at each meeting sets a target for the federal funds rate and instructs the Manager of the Open Market Desk to achieve that target over the intermeeting period by buying or selling securities. By adjusting this single rate, the Federal Reserve affects the broader array of interest rates and asset prices in the economy and, in turn, affects aggregate demand, the level of real economic activity, and inflation.

There are two ways of describing the ...

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