1. a stock balance of payments deficit.
2. a flow balance of payments deficit.
3. a stock balance of payments surplus.
4. a flow balance of payments surplus.
Choose the correct option.
The right answer is option 3. The increase in the banking system's desired reserve ratio reduces the stock of money associated with the given initial stock of base money. Domestic residents reestablish portfolio equilibrium by selling assets abroad to replenish their nominal money holdings. The authorities have to sell domestic currency and buy foreign currency to maintain the fixed exchange rate. This is a one-shot addition to the stock of reserves accompanied by an equal one-shot addition to the stock of base money sufficient to return the money supply to its equilibrium level. This would have been flow balance of payments surplus if the banking system's desired ratio of reserves to deposits began increasing at a given rate per unit time, period after period.