Foreign Exchange Reserves and Capital Account

Foreign exchange reserves refer to the foreign currencies held by a country's central bank or monetary authority. These reserves are generally used to stabilize the domestic currency, pay for imports or debts, or intervene in foreign exchange markets to influence the exchange rate. The capital account, on the other hand, is a component of a country's balance of payments that records the transactions related to the acquisition and disposal of non-produced, non-financial assets, such as land, natural resources, and patents.

Credit Side of Capital Account

The credit side of the capital account records the inflows of capital into the country, such as foreign investment, loans, and grants. An increase in foreign exchange reserves can also be considered as an inflow of capital, as it reflects the accumulation of foreign assets by the central bank. However, the increase in reserves does not represent a direct acquisition of non-produced, non-financial assets, which are the primary focus of the capital account. Therefore, recording the increase in reserves on the credit side of the capital account would be incorrect.

Correct Answer: False

Conclusion

In conclusion, an increase in foreign exchange reserves is not recorded on the credit side of the capital account, but rather on the asset side of the central bank's balance sheet. However, the increase in reserves can indirectly affect the capital account by influencing the exchange rate, which can affect the valuation of non-produced, non-financial assets.