When purchasing foreign goods, which of the following typically occurs in the importing country's economy?

• A. The importing country increases its exports automatically.
• B. Domestic currency is exchanged for foreign currency to pay for the goods.
• C. The domestic supply of money increases due to the purchase.
• D. No impact occurs on the balance of payments.

Answer: (B)

Verified step by step guidance

1. Understand the transaction: When a country imports goods, it needs to pay the foreign exporter in the foreign currency, not its own domestic currency.
2. Identify the currency exchange process: To pay for the imported goods, the importing country’s residents or businesses must exchange their domestic currency for the foreign currency.
3. Analyze the impact on the domestic currency: This exchange means that domestic currency is sold in the foreign exchange market, and foreign currency is bought to complete the payment.
4. Consider the balance of payments: The purchase of foreign goods is recorded as an import in the current account, which affects the balance of payments by increasing the outflow of domestic currency.
5. Conclude the typical outcome: Therefore, the key effect is that domestic currency is exchanged for foreign currency to pay for the imported goods, rather than automatically increasing exports or domestic money supply.