If the Fed sells foreign assets, the monetary base will

Question

Quizplus · Accepted Answer

When the Fed sells foreign assets, it receives foreign currency in exchange. If the Fed chooses to buy domestic bank deposits with the proceeds, the monetary base will not change, as the Fed is exchanging one asset (foreign currency) for another (domestic bank deposits). If the Fed chooses to buy domestic currency with the proceeds, the monetary base will fall as the Fed is removing currency from circulation. Therefore, the monetary base will fall by the amount of the sale, regardless of whether the Fed buys domestic bank deposits or domestic currency with the proceeds. Option D is incorrect because selling foreign assets does not increase the monetary base.

If the Fed Sells Foreign Assets, the Monetary Base Will