How does an economy's central bank manage the supply of money ...

[daltonest1984]

How does an economy's central bank manage the supply of money through official reserve transactions?
 
  What will be an ideal response?

Question 2

Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 150 euros and the representative U.S.
 
  basket costs 90, and the dollar/euro exchange rate is 0.80 per euro, then the price of the European basket in terms of U.S. basket is:

[T4T]

Answer to Question 1

Official foreign exchange interventions are a way for the central bank to inject money into the economy or withdraw it from circulation. They can buy or sell international reserves in private asset markets in order to alter macroeconomic conditions without noticeably impacting the money supply. When a central bank purchases or sells a foreign asset, the transaction appears in its country's financial account as if a private citizen had carried out the same transaction.

Answer to Question 2

(0.80 /euro) (150 euro per a European basket)/(90 /U.S. basket) = 1.33 U.S. baskets/European basket.