The central bank of Alanza, a developing economy, persistently intervenes in the foreign exchange market to prevent its currency from appreciating against the dollar. Which of the following is the most probable consequence of this intervention by the central bank?

Question

Quizplus · Accepted Answer

The central bank's intervention to prevent currency appreciation typically involves buying foreign currency (in this case, dollars) and selling its own currency. This increases the domestic money supply, which can lead to higher inflation if the additional money leads to increased demand that outpaces the economy's ability to supply goods and services.

The Central Bank of Alanza, a Developing Economy, Persistently Intervenes