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 9 months ago

Bank Of England Rate Cut On Thursday, Aug 4, 2016 the Bank of England cut its...

Bank Of England Rate Cut On Thursday, Aug 4, 2016 the Bank of England cut its interest rate to 0.25% -- the lowest it’s ever been in the central bank’s 332-year history. They also announced the government would buy government and corporate bonds (quantitative easing). Check out this article in The Guardian. This is all in response to changes in the economy since the UK voted to leave the European Union in June. What is the central bank trying to...

Assume the Central Bank buys $400 K in US Treasury Bonds from corporations and the households. Also assume

Assume the Central Bank buys $400 K in US Treasury Bonds from corporations and the households. Also assume that the required ratio is .15 and the currency drain/currency ratio (how much people like to hold in cash rather than in their banks) is .12, then how much did the money supply increase or decrease? (hint - keep no more than 3 decimal places in your money multiplier and select the answer that comes closest)

When a central bank purchases the bonds of its country to ease stress on the government's...

When a central bank purchases the bonds of its country to ease stress on the government's budget, this is known as _____ and can lead to _____. Monetizing the debt; inflation Fiscal policy tightening; inflation Monetizing the debt; currency appreciation Fiscal policy tightening; currency appreciation

1. If the government sells U.S. Treasury bonds to finance its budget deficit, one would expect:...

1. If the government sells U.S. Treasury bonds to finance its budget deficit, one would expect: A. interest rates to rise. B. domestic investment to rise. C. tax rates to fall. D. inflation to rise. E. interest rates to fall. Suppose the real interest rate in the economy is 3% and the nominal interest rate is 6%, what is the current inflation rate? a. 18% b. 9% c. 2% d. 3% e. 2.5% Which of the following actions of the...

You are considering buying a 10-year U.S. Treasury bond at the upcoming Treasury auction. Assume that...

You are considering buying a 10-year U.S. Treasury bond at the upcoming Treasury auction. Assume that the bond has the following features: coupon rate: 2.27%, with semi-annual coupon payments Face value: $1,000 matures in 10 years In the auction, the annual yield to maturity determined by the auction is 2.92%. What is the price that you will pay for this bond? Do not round at intermediate steps in your calculation. Round your answer to the nearest penny. Do NOT include...

Is it true that U.S. Treasury security is risk free? Why is it that municipal bonds...

Is it true that U.S. Treasury security is risk free? Why is it that municipal bonds are not taxed at the federal level, but are taxable across state lines? Why is it that U.S. Treasury bonds are not taxable at the state level? (You may need to dust off the history books for this one.)

A wealthy investor holds $700,000 worth of U.S. Treasury bonds. These bonds are currently being quoted...

A wealthy investor holds $700,000 worth of U.S. Treasury bonds. These bonds are currently being quoted at 105105 % of par. The investor is concerned, however, that rates are headed up over the next six months, and he would like to do something to protect this bond portfolio. His broker advises him to set up a hedge using T-bond futures contracts. Assume these contracts are now trading at 110 -12. a. Briefly describe how the investor would set up this...

A wealthy investor holds $600,000 worth of U.S. Treasury bonds. These bonds are currently being quoted...

A wealthy investor holds $600,000 worth of U.S. Treasury bonds. These bonds are currently being quoted at 107% of par. The investor is concerned, however, that rates are headed up over the next six months, and he would like to do something to protect this bond portfolio. His broker advises him to set up a hedge usingT-bond futures contracts. Assume these contracts are now trading at 111-00 a. Briefly describe how the investor would set up this hedge. Would he...

4.U.S. Treasury bonds pay coupon interest semiannually. Suppose a Treasury bond matures in two years, the...

4.U.S. Treasury bonds pay coupon interest semiannually. Suppose a Treasury bond matures in two years, the annual coupon rate is 2.6 percent, the face value is $1,000, and the annual yield to maturity is 3.5 percent. a. What is the duration of the bond? b. What is the modified duration? c. What is the dollar duration? d. What would be the change in price of the bond if there was a 10 basis point change in the return?

The price quotations of U.S. Treasury bonds show an ask price of 101.78 and a bid...

The price quotations of U.S. Treasury bonds show an ask price of 101.78 and a bid price of 101.49. If you want to buy one bond at the market price, what is the dollar price you expect to pay? Do not round your answer.

Question