For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that a reduction in stock market wealth causes a decrease in consumption.Which of the following will tend to occur in a fixed exchange rate regime?
A)a reduction in Y
B)a reduction in the money supply
C)no change in the domestic interest rate
D)all of the above

Question

Quizplus · Accepted Answer

In a fixed exchange rate regime, a reduction in stock market wealth leading to decreased consumption would likely cause a reduction in aggregate demand and thus a reduction in output (Y). To maintain the fixed exchange rate, the central bank might intervene in the foreign exchange market, which could involve adjusting the money supply. Additionally, maintaining a fixed exchange rate often involves keeping domestic interest rates relatively stable to prevent capital flows that could disrupt the fixed rate, hence no significant change in the domestic interest rate might be observed. Therefore, all of the mentioned effects (A, B, C) could occur under these circumstances.

For This Question,assume That Policy Makers Are Pursuing a Fixed