Work It Out, Chapter 20, Question 1

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
Suppose that a country has a local currency known as the dollar, its money supply is 1 thousand 500 million dollars, and its domestic credit is equal to 1 thousand million dollars in the year 2015. The country maintains a fixed exchange rate, the central bank monetizes any government budget deficit, and prices are sticky. We know that money supply M equals 1 thousand 500 million dollars and the domestic credit B equals 1 thousand million dollars.

(Description)
The following text is written: Set the problem: M equals 1500 million dollars. B equals 1000 million dollars.

(Speaker)
We have to compute total reserves for the year 2015. Knowing that money supply M equals domestic credit B plus reserves R we can write 1 thousand 500 million dollars equals 1 thousand million dollars plus R. Isolating R we obtain R equals 500 million dollars.

(Description)
The following relations are written: M equals B plus R. 1500 million dollars equals 1000 million dollars plus R. R equals 500 million dollars.

Work It Out, Chapter 20, Question 2

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
We assume that the government unexpectedly runs a 200 million dollar deficit in the year 2016 and the money supply is unchanged. What have to find the new level of reserves. If the government runs a 200 million dollar deficit, it must issue more domestic credit, or bonds, such that B is now equal 1 thousand 200 million dollars.

(Description)
The following relation is written: B equals 1200 million dollars.

(Speaker)
Remembering that money supply equals B plus R, we have 1 thousand 500 million dollars equals 1 thousand 200 million dollars plus R.

(Description)
The following relation are written below the previous one: M equals B plus R. 1500 million dollars equals 1200 million dollars plus R.

(Speaker)
Isolating R we obtain R equals 300 million dollars.

(Description)
The following relation is written below the previous one: R equals 300 million dollars.

Work It Out, Chapter 20, Question 3

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
The question will ask if the central bank will be able to defend the fixed exchange rate if the deficit is unexpected. Since the central bank’s reserves are higher than the deficit, the central bank is able to defend the peg.

(Description)
The following text is written: R is greater than 200 million dollars.

Work It Out, Chapter 20, Question 4

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
We are asked what will happen to the central bank’s reserves if the government runs a deficit of 200 million dollars each year from this point forward.

(Description)
The reserves will decrease each year by an amount equal to the deficit.

(Speaker)
The following relation is written: R subscript 2016 is larger than R subscript 2017 is larger than R subscript 2018 three dots.

Work It Out, Chapter 20, Question 5

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
The question will ask in what year will the central bank be forced to abandon its exchange rate peg and why. The reserves will decrease each year by 200 million dollars and will be depleted by 2018.

(Description)
The following text is written: 2016 R equals 300 million dollars. 2017 R equals 100 million dollars. 2018 R equals zero.

Work It Out, Chapter 20, Question 6

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
The question will ask how the answer to part (e) would change if the future deficits are anticipated? If continually increasing deficits are anticipated, people will speculate that the fixed rate is going to break in the near future, which would be followed by a sharp depreciation of the currency.

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The corresponding portion of the text is written.

(Speaker)
Not wanting to hold a currency that will eventually depreciate, knowledgeable investors reduce their demand for the dollar now.

(Description)
The corresponding portion of the text is written below the previous one.

(Speaker)
This speculative attack eats up the remaining reserves in as much as the central bank tries to defend the peg, and the break form the fixed exchange rate comes much sooner than it would have in the unanticipated case.

(Description)
The corresponding portion of the text is written below the previous one.