Assume that the Bank of England decided to reduce its purchases of U.S. treasury bonds and...

Assume that the Bank of England decided to reduce its purchases of U.S. treasury bonds and instead held more dollars on deposit at the Fed. How this will affect the monetary base? What would be the appropriate monetary policy action to offset such a change?

Expert Solution

Ans 5. This case there is a situation where it is assumed that the bank of England decided to reduce its purchase of US Treasury bonds and instead held more dollars on deposit at the Fed.
It means with this policy it increases the liquidity of the bank of England because to holding cash in the form of dollars is more liquid then the US Treasury bonds and it is also a good policy to maintain the prices stability because there is a chance of decreasing the value of US Treasury bonds in near future but it is not possible to decrease the value of Dollar frequently in comparison to the bonds.
The effect on the monetary base is that the liquid monetary base increases but there is a chance of of low rate of return in near future because treasury Bond provided a good rate of return in comparison to just holding the dollars.
The most appropriate policy that is monetary policy is to maintain a price liquidity in the overall leverage of Bank of England so for this it is necessary to maintain a perfect ratio of liquidity and the portfolio investment.

Rahul Sunny answered 8 months ago

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