Tuesday, October 20, 2009

Monetary Economics 101 -- Quiz

Paul Krugman wrote this on his blog:

..."what would the effect be if China decided to sell a chunk of its Treasury bill holdings and put them in other currencies? The answer is that China would, in effect, be engaging in quantitative easing on behalf of the Fed. The Chinese would be doing us a favor! (And doing the Europeans and Japanese a lot of harm.)...

...The point is that right now the United States has nothing to fear from Chinese threats to diversify out of the dollar. On the contrary, if the Chinese do decide to start selling dollars, Tim Geithner and Ben Bernanke should send them a nice thank-you note"...


Questions:

1) Why is China selling T Bills = quantitative easing of US money supply?
2) What "harm", if any, would that cause to Japan and Europe -- as Krugman claims?
2) In what way, if any, US has "nothing" to fear?
3) In what way, if any, China selling US dollars massively could be negative?
4) Define "negative".

Have fun.

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