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According to the Krugman Obstfeld textbook, When a central bank sells foreign bonds, it decreases domestic money supply. My question is: foreign bonds are denoted in foreign currency. Selling these bonds would involve a receipt of foreign currency. Why would this decrease domestic money supply?

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  • $\begingroup$ The idea is that the central bank sells foreign bonds for domestic currency, either directly or indirectly for foreign currency which it then uses to buy domestic currency. $\endgroup$ – Henry Nov 30 '18 at 10:43

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