If a Central Bank prints its currency and exchanges it for foreign currency, its domestic monetary base ________ and its International Reserves _________.

Question

BlackTom AI · Accepted Answer

When a central bank prints domestic currency and uses it to buy foreign currency, the monetary base rises and foreign (international) reserves rise.

1. Relevant concepts
- Monetary base (high-powered money) = currency in circulation + banks’ reserves at the central bank (a liability of the central bank).
- International reserves (foreign exchange reserves) = foreign currency assets held by the central bank (an asset).
- Central bank balance sheet identity: Assets = Liabilities. Foreign reserves are assets; monetary base (currency and reserves) is a primary liability.

2. Step-by-step reasoning
- The central bank issues new domestic currency (prints money). This increases its liabilities (monetary base) because newly issued currency and/or bank reserves are added.
- The central bank uses the newly printed domestic currency to purchase foreign currency on the market. In return, it receives foreign currency assets, increasing its assets (international reserves).
- Balance-sheet view: Assets (+foreign reserves) increase by the purchase amount; Liabilities (+monetary base) increase by the same amount to keep Assets = Liabilities.

3. Numerical illustration (intermediate steps)
- Suppose the central bank prints 100 units of domestic currency and buys 100 units of foreign currency.
- Asset side: Foreign reserves +100.
- Liability side: Currency in circulation or bank reserves +100.
- Net effect: Monetary base increases by 100; international reserves increase by 100.

4. Why the correct answer is correct
- Printing and exchanging domestic currency for foreign currency directly increases both the domestic monetary base (liabilities) and international reserves (assets) simultaneously.

5. Why other options are incorrect
- A (Decreases, decrease): opposite of what happens when printing and buying foreign currency.
- B (Decreases, increase): monetary base does not decrease when new currency is issued.
- D (Increases, decrease): buying foreign currency increases reserves; only selling foreign currency would decrease them.

6. Conclusion
Therefore the correct choice is C) Increases, increase — monetary base increases and international reserves increase, matching the provided answer.

If a Central Bank prints its currency and exchanges it for foreign currency, its domestic monetary base and its International Reserves _.单项选择题

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If a Central Bank prints its currency and exchanges it for foreign currency, its domestic monetary base ________ and its International Reserves _________.单项选择题