Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency.This causes the
A) domestic money supply to decrease and a decline in aggregate demand
B) domestic money supply to increase and a decline in aggregate demand
C) domestic money supply to decrease and a rise in aggregate demand
D) domestic money supply to increase and a fall in aggregate demand

Question

Quizplus · Accepted Answer

When a central bank buys its own currency using foreign reserves, it reduces the domestic money supply, leading to a decline in aggregate demand.

Suppose a Central Bank Prevents a Depreciation of Its Currency