Suppose that a country has a current account surplus and the central bank intervenes in the foreign exchange market and does nothing else. Which of the following statements is true in this case?
A) The surplus will get worse.
B) The exchange rate will appreciate.
C) The supply of money will rise.
D) The supply of money will fall.
E) The demand for money would fall.

Question

Quizplus · Accepted Answer

When the central bank intervenes in the foreign exchange market to maintain a current account surplus, it typically buys foreign currency, which increases the domestic money supply.

Suppose That a Country Has a Current Account Surplus and the Central