In a target zone system in which the money supply is to be varied in response to exchange rate variations as the exchange rate hits the ceiling or floor, if a country's exchange rate (units of home currency per unit of foreign currency) hits the ceiling, the monetary authorities would be required to __________ the money supply; this change in the money supply would be carried out in order to __________ the value of the home currency.

Question

Quizplus · Accepted Answer

If the exchange rate hits the ceiling, it means that the home currency has appreciated too much, making the country's exports more expensive and less competitive. To counteract this, the monetary authorities would need to decrease the money supply, which would cause the home currency to depreciate and become more competitive in international markets.

In a Target Zone System in Which the Money Supply