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 $2 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 New Pesos by purchasing or increasing their holding of international reserves.
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 undervalued. To maintain this fixed rate, the government must decrease the supply of the nation's currency. To decrease the supply of New Pesos, the government can either lower domestic interest rates or supply additional New Pesos by purchasing or increasing their holding of international reserves.

Suppose the Government of New Country Has Fixed the Value