If the United States has a current account deficit with England of $1 million,and the Bank of England sells $1 million worth of pounds in the foreign exchange market,then England ________ $1 million of international reserves and its monetary base ________ by $1 million.

Question

Quizplus · Accepted Answer

When the Bank of England sells $1 million worth of pounds in the foreign exchange market to balance the current account deficit, it is essentially exchanging pounds for dollars. This action increases England's international reserves by $1 million (as it now holds more foreign currency) and also increases its monetary base by the same amount, as the sale injects additional currency (dollars converted to pounds) into its economy.

If the United States Has a Current Account Deficit with England