4. How a foreign exchange intervention by the Treasury affects the monetary base

Suppose that the Treasury Department wants the U.S. dollar to appreciate against the Canadian dollar.

The Treasury will order the Federal Reserve Bank of New York to ____(sell,buy) dollars and___(sell,Buy) Canadian dollars through the foreign exchange department of American commercial banks.

The following graph shows the market for foreign exchange, where the supply curve depicts the supply of the U.S., dollar and the demand curve depicts the demand for the U.S. dollar.

Adjust the following graph to illustrate the actions by the Federal Reserve Bank of New York. 9

The supply of dollars in the foreign exchange market ___(increase,do not change,decrease), the demand for dollars ____(increase,do not change, increase), and thus the value of the dollar___ (falls, rises) against the Canadian dollar. As a result, the monetary base in the U.S. will___ (decrease, increase, do not change) because ____ (bank reserves will decrease, bank reserves will increase, currency in circulation will decrease, currency in circulation will increase)