Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency.Other things equal this causes the
A) domestic money supply to decrease and a decline in aggregate demand.
B) domestic money supply to increase and a decline in aggregate demand.
C) domestic money supply to decrease and a rise in aggregate demand.
D) domestic money supply to increase and a rise in aggregate demand.

Question

Quizplus · Accepted Answer

By buying its own currency with foreign currency, the central bank is decreasing the supply of domestic money. This will lead to a decrease in aggregate demand, as there is less money available for consumers and firms to spend.

Suppose a Central Bank Prevents a Depreciation of Its Currency