How can a central bank change the composition of the money supply and increase the backing ratio?
A) It can confiscate any foreign currency held by private citizens.
B) It can borrow from the public and investing in foreign currency assets.
C) It can bail out insolvent banks.
D) It can expand the money supply.

Question

Quizplus · Accepted Answer

A central bank can increase the backing ratio by borrowing from the public and investing in foreign currency assets. This will increase the assets held by the central bank, and thus increase the backing ratio of the money supply. Option A is not a feasible choice as it involves confiscation of private property, which is not a legitimate action for a central bank. Option C involves bailing out insolvent banks, which may have an impact on the money supply, but not necessarily on the backing ratio. Option D involves expanding the money supply, which may have the effect of reducing the backing ratio if not accompanied by an increase in assets held by the central bank.

How Can a Central Bank Change the Composition of the Money