From Mishkin (2016, p. 500):

enter image description here

Explanation of what the supply curve here is, from p. 478:

The quantity of dollar assets supplied is primarily the quantity of bank deposits, bonds, and equities in the United States, and for all practical purposes we can take this amount as fixed with respect to the exchange rate. The quantity supplied at any exchange rate is the same, so the supply curve, $S$, is vertical,

From p. 499:

the outcome for the monetary base is exactly the same when a central bank sells foreign assets to purchase domestic bank deposits or domestic currency. This is why, when we say that a central bank has purchased its domestic currency, we do not have to distinguish between currency and bank deposits denominated in the domestic currency.

So, say the US government buys US\$1B in bank deposits and sells the corresponding amount in foreign assets. Bank deposits are part of the supply of dollar assets and have been reduced by US\$1B. So, why doesn't the supply curve in the above figure shift left?


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.