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 asset 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 asset 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 asset 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 asset 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 asset implies an increased home money supply.

Question

Quizplus · Accepted Answer

If central banks are not sterilizing, an increase in foreign asset implies an increased home money supply. This is because the home country's central bank sells the foreign currency received in exchange for domestic currency. The increased supply of domestic currency leads to an increase in the home money supply. A balance of payments surplus means that the home country is receiving more foreign currency than it is spending, so the central bank's foreign assets increase.

Which One of the Following Statements Is the Most Correct