When a country must make a net payment to foreigners because of a balance-of-payments deficit,the central bank of the country
A)should do nothing.
B)should run down its official reserve assets (e.g.,gold,foreign exchanges,and SDRs).
C)should borrow anew from foreign central banks.
D)should either run down its official reserve assets (e.g.,gold,foreign exchanges,and SDRs)or borrow anew from foreign central banks.

Question

Quizplus · Accepted Answer

When a country has a balance-of-payments deficit, it means that it is spending more on imports than it is earning from exports. This leads to a net payment to foreigners, which can put pressure on the country's official reserve assets (e.g., gold, foreign exchanges, and SDRs). In such a situation, the central bank of the country has two options: it can either run down its official reserve assets or borrow anew from foreign central banks. Running down the reserve assets can be a temporary solution, but it may not be sustainable in the long term. Borrowing from foreign central banks can provide a more sustainable solution, but it comes with the risk of increasing the country's external debt. Therefore, the central bank should carefully consider both options and choose the one that is most appropriate for the country's specific circumstances.

When a Country Must Make a Net Payment to Foreigners