True or False?
The statement is false. If the authorities hold the domestic source component of the stock of base money constant reserves would indeed have to increase. Domestic residents would sell non-monetary assets abroad to acquire the desired increment to nominal money holdings. And the authorities would be forced to exchange domestic base money for official foreign exchange reserves to maintain the fixed exchange rate. But the government can avoid accumulating foreign exchange reserves by simply buying sufficient domestic bonds to provide the required increase in the stock of base money. In fact, by buying even more domestic bonds it can actually bring about a reduction in official reserve holdings while still creating the necessary increase in the stock of money.
In fact, open market operations (and other changes in Dsc) provide the means for the government to keep the stock of foreign exchange reserves at an appropriate level. It can buy and sell foreign exchange reserves on a day-by-day basis to keep the exchange rate fixed and then use open market operations in domestic securities to maintain an appropriate inventory of reserves. A stock of official reserves larger than necessary to finance day-to-day operations results in the government, and indirectly the residents of the domestic economy, holding securities that normally earn less interest than could otherwise be earned on domestically owned capital.