Suppose the Bank of Japan buys U.S. dollar assets using yen; this causes:

Question

BlackTom AI · Accepted Answer

A central-bank purchase of foreign assets increases that bank’s foreign reserves and injects foreign currency into the foreign country’s banking system, so the correct answer is d.

Relevant concepts: central-bank balance sheets and how open-market operations with foreign assets affect reserve balances. When a central bank (here the Bank of Japan, BoJ) purchases U.S. dollar assets, it acquires dollar-denominated claims (foreign assets) and makes payment in a way that increases dollar deposits/reserves in U.S. banks. The U.S. monetary base (currency in circulation plus reserves at the Federal Reserve) rises when reserves are credited.

Step-by-step reasoning with simplified T-accounts:
1. Before the transaction: BoJ has some domestic liabilities (yen base) and assets (domestic and foreign).
2. BoJ buys $X of U.S. assets. BoJ’s assets: foreign assets increase by $X.
3. Payment mechanism: the BoJ arranges the dollar payment via its correspondent or by instructing the seller’s U.S. bank to credit the seller’s dollar account. That credit increases deposits at U.S. banks; corresponding reserves at the Federal Reserve are increased by $X to settle the dollar payment.
4. On U.S. side: U.S. bank reserves at the Fed increase by $X (part of the U.S. monetary base). The Fed’s liabilities (reserves) therefore rise.

Intermediate accounting view:
- BoJ assets: +$X (foreign assets)
- U.S. banking system: reserves at Fed: +$X → U.S. monetary base increases by $X

Why this option is correct: the BoJ acquires foreign (dollar) assets — so foreign assets increase — and the payment process credits dollar balances in the U.S. banking system, raising reserve balances and hence the U.S. monetary base.

Why other options are incorrect:
- (a) and (b) state a decrease in foreign assets, but the BoJ is buying (not selling) U.S. assets, so foreign assets rise, not fall.
- (c) claims a decrease in the U.S. base; in fact the transaction injects dollars/reserves into U.S. banks, so the U.S. base increases, not decreases.

Conclusion: the transaction causes an increase in foreign assets and an increase in the U.S. monetary base, confirming answer d.

Suppose the Bank of Japan buys U.S. dollar assets using yen; this causes:Single choice

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