Question:
Which is most likely to cause an increase of the money supply in a certain country?
(1) A Balance of Payments surplus
(2) A government budget surplus
(3) Cash withdrawal by commercial bank depositors
(4) Recall of loans by the commercial banks
(5) Selling securities to commercial banks by the Central Bank
Correct Answer:
(1)
Answer Explanation:
A Balance of Payments (BOP) surplus means there is a net inflow of foreign currency into the country. When the Central Bank purchases this excess foreign exchange to stabilize the exchange rate, it pays with newly created domestic currency, thereby injecting reserve money and increasing the domestic money supply.
Topic: Money and Banking Year: 2018
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