Starting from a position where a nation's money demand equals the money supply and its balance of payments is in equilibrium.According to the monetary approach to the balance of payments,when the nation's central bank increases money supply,the balance of trade moves into ________ position and net official holding of foreign reserves ________.
A) surplus; increases
B) surplus; decreases
C) deficit; increases
D) deficit; decreases

Question

Quizplus · Accepted Answer

When a nation's central bank increases the money supply, it typically leads to inflation and a decrease in the value of the nation's currency relative to others. This makes imports more expensive and exports cheaper to foreign buyers, potentially worsening the balance of trade (moving towards a deficit). Additionally, to support the currency and mitigate inflation, the central bank might sell foreign reserves, leading to a decrease in net official holdings of foreign reserves.

Starting from a Position Where a Nation's Money Demand Equals