Under a fixed exchange standard,if the domestic demand for foreign exchange increases
A)the central monetary authority must meet the demand out of its reserves.
B)the central monetary authority must increase the supply of domestic money.
C)the fixed exchange standard will breakdown.
D)inflation will increase.
E)the domestic currency must be depreciated.

Question

Quizplus · Accepted Answer

Under a fixed exchange standard, the value of the domestic currency is tied to the value of a foreign currency. Therefore, if the demand for foreign exchange increases, the central monetary authority must meet the demand out of its reserves to maintain the fixed exchange rate. This may lead to a decrease in the central bank's reserves, which may reduce its ability to defend the fixed exchange rate in the future.

Under a Fixed Exchange Standard,if the Domestic Demand for Foreign