Answer:
D) an increase; an increase
- Everything else held constant, this transaction will cause AN INCREASE in the foreign assets held by the Federal Reserve and AN INCREASE in the U.S. monetary base.
Explanation:
Since Japanese banks are buying US dollars with Japanese yens, the total amount of foreign currency held by the Federal Reserve will increase ⇒ it will basically hold more yens.
Since the monetary base is defined as the total amount of money circulating in the economy + money held by commercial banks in their own vaults + reserves held by the Fed, an increase in foreign currencies held by the FED will increase the monetary base.
