How a foreign exchange intervention by the Treasury affectsthe monetary base
Suppose that the Treasury Department wants the U.S. dollar to appreciate against the Brazilian real.
The Treasury will order the Federal Reserve Bank of New York to _______ ( buy or sell) dollars and _______ ( Buy or sell) Brazilian real through the foreign exchange department of American commercial banks.
The supply of dollars in the foreign exchange market _______ (does not change, increases, or decreases) , the demand for dollars ________ (decreases, does not change, or increases), and thus the value of the dollar ___________ (rises, falls) against the Brazilian real. As a result, the monetary base in the U.S. will __________ (increase, not change, or decrease) because _________ (currency in circulation will decrease, bank reserves will increase, currency in circulation will increase, or bank reserves will decrease