When the central bank sells foreign exchange and buys domestic currency, to finance a balance of payments ________, domestic money in circulation ______.
A) deficit, falls
B) deficit, rises
C) surplus, falls
D) surplus, rises

Question

Quizplus · Accepted Answer

When the central bank sells foreign exchange and buys domestic currency to finance a balance of payments deficit, it is essentially removing domestic currency from circulation to purchase foreign currency, thereby reducing the amount of domestic money in circulation.

When the Central Bank Sells Foreign Exchange and Buys Domestic