If a country with a fixed exchange rate tries to raise its money stock:

Question

Quizplus · Accepted Answer

If a country with a fixed exchange rate tries to raise its money stock, its central bank will lose international reserves. This is because to increase the money supply, the central bank needs to buy domestic government bonds, which increases the amount of money in circulation. However, this also results in an outflow of foreign exchange reserves because the exchange rate is fixed and the demand for domestic currency increases. Option A is incorrect because the central bank does not lose domestic government bonds, it buys them. Option C is incorrect because the money stock will eventually stop rising as the central bank runs out of international reserves to sell.

If a Country with a Fixed Exchange Rate Tries to Raise