Under a fixed exchange rate, a balance-of-payments surplus for a country will lead to a __________ in the money supply as the country's central bank __________ in order to maintain the fixed exchange rate.
A) rise; purchases domestic currency
B) rise; purchases foreign exchange
C) fall; sells domestic currency
D) fall; sells foreign exchange

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, a balance-of-payments surplus indicates that a country is receiving more foreign currency than it is paying out. To maintain the fixed exchange rate, the country's central bank will purchase foreign exchange (foreign currencies) using its own currency. This action increases the domestic money supply because it injects more of the domestic currency into the economy.

Under a Fixed Exchange Rate, a Balance-Of-Payments Surplus for a Country