Under a fixed exchange rate system,at high domestic real interest rates the demand for domestic currency ________,so the central bank ________ foreign-exchange reserves.
A) increases; acquires
B) increases; loses
C) decreases; acquires
D) decreases; loses

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, the central bank intervenes in the foreign exchange market to maintain the fixed exchange rate. When domestic real interest rates are high, the demand for domestic currency increases as foreign investors are attracted to the higher returns. To prevent the domestic currency from appreciating, the central bank must acquire foreign-exchange reserves by selling domestic currency in the foreign exchange market.

Under a Fixed Exchange Rate System,at High Domestic Real Interest