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 rise in aggregate demand

Question

Quizplus · Accepted Answer

When a central bank buys its own currency with foreign currency, it decreases the supply of domestic currency in the market, which leads to a decrease in the domestic money supply. As a result, the purchasing power of consumers and businesses declines, leading to a decline in aggregate demand.

Suppose a Central Bank Prevents a Depreciation of Its Currency