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Business Economics

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TOPICS IN BUSINESS ECONOMICS – FALL 2012

QUIZ ANSWERS

Below are the quarter-end balance sheet figures of CBRT

[pic]

a) Find the magnitude and sign of (short/long) FX position in the beginning and end quarter. Find the changes in FX position, domestic assets, central bank money, reserve money, other central bank money

Answers:

[pic] (long)

[pic]

b) Interpret the change in valuation account (incorporate the FX position in your line of reasoning)

In the case of long FX position, a depreciation of TL (appreciation of FX) leads to a net profit. Since the valuation account is recorded on the asset side, this increase in profit leads to a decrease in the valuation account on the asset side. FX gain is 4,9 billion TL.

c) Interpret the change in central bank money. What actions of CBRT may be the source of this change? (Include the change in valuation account in your analysis)

Total FX position change is 9.1 billion TL. Appreciation of FX vis-a-vis TL caused FX gain of 4,9 billion TL (in the case of long position). So FX purchase is 4,2 billion TL. Increase in other domestic assets is 0,4 billion TL. So the increase in central bank money (4,5 billion TL) comes from FX purchase of 4,2 billion TL and other domestic asset increase of 0,4 billion TL. (Collect FX from the market or extend credit to the public and issue equal amount of TL)

d) Compare the changes in central bank money and reserve money and interpret the result. What is the change in money supply and liquidity? If there is any discrepancy, what policy actions may CBRT have taken and for what reason?

There is an increase of 4,5 billion TL in money supply (CBM) while liquidity (reserve money) is down by 0,3 billion TL. So liquidity increase accompanying money supply is sterilized. The reason of sterilization is that, excess liquidity may lead to overheating in the economy and price destabilization (inflation).

Due to withdrawal of public deposits amounting to 0,9 billion TL (another other source of liquidity increase), total amount of liquidity increase before sterilization is 5,4 billion TL (4,5 + 0,9). Excess liquidity is sterilized by reverse-repo (increase in OMO liabilities) of 5,7 billion TL. Since reverse-repo is more than initial liquidity increase, reserve money is down by 0,3 billion TL (5,7 - 5,4). The reserve money decrease is in the form of withdrawal of reserve requirements - possibly due to change in requirement ratios or decrease in bank deposits. Currency in circulation is unchanged.

e) What may be the possible effect of FX purchases of CBRT on FX rates holding all other factors constant? Will TL depreciate or appreciate vis-a-vis FX?

Purchase of FX will push down the FX supply in the market. TL will depreciate vis-a-vis FX (while FX appreciates)

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