Suppose the government of New Country has fixed the value of its currency, the New Peso, at $1 per New Peso, but the market equilibrium value of the New Peso is $0.50 per New Peso. In order to maintain the official value of the New Peso the Central Bank of New Country must either ________ domestic interest rates, or ________ the supply of international reserves by purchasing New Pesos.
A)raise; increase
B)raise; decrease
C)lower; decrease
D)lower; increase

Question

Quizplus · Accepted Answer

Note that at $1 per New Peso, the New Peso is overvalued. To maintain this fixed rate, the government must increase the demand for the nation's currency. To increase demand for New Pesos, the government can either raise domestic interest rates or purchase New Pesos, where the later decreases New Country's international reserves.

Suppose the Government of New Country Has Fixed the Value