Assume the Money Supply Is Backed by Bonds and Reserves

question 116

Multiple Choice

Assume the money supply is backed by bonds and reserves, and the exchange rate is pegged. If the demand for money rises, how might the central bank maintain the peg?

• A) by selling back domestic bonds and foreign currency reserves
• B) by selling domestic bonds equal to the increase in demand
• C) by purchasing reserves equal to the increase in demand
• D) by selling reserves equal to the increase in demand

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Definitions:

First-In First-Out

An inventory valuation method where the first items produced or acquired are the first to be sold or used.

Temporal Method

A method for currency translation that uses exchange rates based on the time assets and liabilities were acquired or incurred.

Lower of Cost

An accounting principle where the inventory is recorded at the lower of its historical cost or market value.

Net Realizable Value

The estimated selling price of goods minus the cost of their sale or disposal, reflecting the net cash expected to be generated.