For the following questions assume the following facts:
(1 ) Balance of Payments = 0 prior to the transactions.
(2 ) Person A (who lives in the United States) purchases an airplane from British Airways for $150,000.
(3 ) Person A pays with a check from his account at First Union Bank in the United States.
(4 ) British airways, since it will need dollars in 1 month, deposits the check at the Bank of England.
(5 ) Bank of England deposits the $150,000 at Commonwealth bank, which is located in the United States.
Due to the transactions above, what are the effects on the reserve at the Fed?
A) Fact 2 is a decrease of $150,000, fact 5 is a decrease of $150,000, a net effect of -$300,000.
B) Fact 3 is a decrease of $150,000, fact 5 is an increase of $150,000, a net effect of 0.
C) Fact 3 is an increase of $150,000, fact 5 is a decrease of $150,000, a net effect of 0.
D) Both fact 3 and fact 5 result in increases of $150,000, a net effect of +$300,000.
E) Both fact 3 and fact 5 result in decrease of $150,000, a net effect of -$300,000.
B
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In the monetary small open-economy model with a fixed exchange rate, the domestic
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