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Posted 5 months ago
The Great Central Bank of Hamsterville sells bonds, which has influenced the interest rate in Hamsterville.
What is the impact of this action on the financial account, the value of th Hamsterville currency (the Hamsterville snark), and imports into Hamsterville in the short run?
Choose 1 answer:
(A) Financial account increases; snark depreciates; imports decrease
(B) Financial account decreases; snark appreciates; imports increase
(C) Financial account increases; snark appreciates; imports decrease
(D) Financial account increases; snark appreciates; imports increase
(E) No impact on the financial account; snark appreciates; imports
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Answer from Sia
Posted 5 months ago
Solution by Steps
step 1
Understand the economic impact of a central bank selling bonds: When a central bank sells bonds, it is typically attempting to reduce the money supply in the economy, which can lead to higher interest rates
step 2
Analyze the impact on the financial account: Higher interest rates can attract foreign investors looking for higher returns on investments, leading to an inflow of foreign capital, which increases the financial account
step 3
Consider the currency value: An increase in demand for Hamsterville's financial assets requires purchasing the Hamsterville snark, which appreciates its value
step 4
Evaluate the effect on imports: An appreciating currency makes imports cheaper; however, since the interest rate has increased, the overall economic activity may slow down, potentially reducing the demand for imports in the short run
Answer
C
Key Concept
Central bank bond sales impact on financial accounts, currency value, and imports
Explanation⚹ ⚹When a central bank sells bonds, it can lead to higher interest rates, attracting foreign investment, increasing the financial account, appreciating the currency, and potentially reducing imports in the short run due to slower economic activity.⚹
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