Fixed Exchange Rate

managed floating

partially floating; not left to fluctuate freely

central bank balance sheet

records assets held by central bank and its liabilities

assets

• international reserves 

• gold 

• claims to future payments by citizens and domestic institutions 

liabilities

• deposits of private banks 

• currency in circulation

Central bank’s total assets

total liabilities + net worth (zero)

asset purchase effect on Money Supply

payment enters MS → liability from asset causes MS to expand

asset sale effect to MS

MS shrinks → cash/check CB receives goes out of circulation → reduces CB liabilities to public

money multiplier effect

magnifies impact of central bank transactions on MS

sterilized foreign exchange intervention

central banks sometimes carry out equal foreign and domestic asset transactions in opposite directions to nullify impact of their foreign exchange operations on domestic MS