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Explaining Central Bank Asset Shifts
A central bank decides to implement a large-scale asset purchase program, primarily buying government bonds from the open market. Explain how this action would fundamentally alter the composition of the asset side of the central bank's balance sheet.
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A central bank's asset portfolio is shown at two different points in time. In Year 1, its assets consisted of: 50% Foreign Currency, 30% Loans to Commercial Banks, and 20% Government Bonds. By Year 5, its portfolio had changed to: 5% Foreign Currency, 5% Loans to Commercial Banks, and 90% Government Bonds. Which of the following central bank actions most likely explains this dramatic shift in asset composition?
A central bank that has recently undertaken a significant quantitative easing program would be expected to show a more diversified asset portfolio, with a smaller percentage of its total assets held in the form of domestic government bonds compared to its pre-program holdings.
Central Bank Balance Sheet Analysis
Explaining Central Bank Asset Shifts