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

Question

Quizplus · Accepted Answer

If central banks are not sterilizing, any increase in the home central bank's foreign assets implies an increased home money supply. This is because the central bank is purchasing foreign currency with domestic currency, and the increase in the supply of domestic currency leads to an increase in the home money supply. If there is a balance of payments surplus, this means there is an excess of inflows of foreign currency, which further contributes to the increase in the home central bank's foreign assets and the home money supply.

Which One of the Following Statements Is the Most Correct