When faced with a an aggregate demand shock, the central bank in an open economy under a fixed exchange rate system and high capital mobility will make necessary adjustment in the
________________ to maintain fixed exchange rate.
A) interest rate
B) exchange rate
C) money supply
D) prices and wages

Question

Quizplus · Accepted Answer

In a fixed exchange rate system with high capital mobility, the central bank adjusts the money supply to maintain the fixed exchange rate. This involves buying or selling foreign currency in exchange for the domestic currency, which affects the domestic money supply.

When Faced with a an Aggregate Demand Shock, the Central