According to the monetary approach of the balance of payments MABP,if the foreign inflation rate decreases 50%,the U.S.foreign reserves will
A) increase because foreign central bank buys U.S. dollars and sells its currency.
B) increase because foreign central bank buys its currency and sells U.S. dollars.
C) decrease because foreign central bank buys U.S. dollars and sells its currency.
D) decrease because foreign central bank buys its currency and sells U.S. dollars.

Question

Quizplus · Accepted Answer

According to MABP, a decrease in the inflation rate of a foreign country leads to a decrease in the demand for foreign currency, including the U.S. dollar. Therefore, the foreign central bank will sell its currency and buy U.S. dollars to maintain the exchange rate, leading to an increase in U.S. foreign reserves. A decrease in foreign inflation means that the foreign currency is appreciating against the U.S. dollar, and the foreign central bank needs to sell its currency to prevent further appreciation. Hence, the correct answer is C.

According to the Monetary Approach of the Balance of Payments