Which one of the following statements is most true?
A) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in a foreign central bank's claims on the home country implies a decreased foreign money supply.
B) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money demand.
C) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply.
D) If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply.
E) If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies an increased domestic money supply.

Question

Quizplus · Accepted Answer

If central banks are not sterilizing and the home country has a balance of payments surplus, the associated decrease in a foreign central bank's claims on the home country implies an increased supply of foreign currency in the home country. This increased supply of foreign currency leads to an increase in the supply of domestic currency in the home country, which could lead to inflationary pressures. Therefore, the foreign money supply would decrease as more domestic currency is supplied in exchange for the surplus foreign currency.

Which One of the Following Statements Is Most True