Under a fixed exchange rate system,a central bank's intervention in the foreign exchange market will not affect the domestic money supply.

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Under a fixed exchange rate system, the central bank must maintain the fixed exchange rate by buying or selling its currency in the foreign exchange market. This intervention will affect the domestic money supply because it involves the central bank either creating or removing domestic currency from circulation. For example, if the central bank sells its currency to buy foreign currency, it will reduce the supply of domestic currency and increase the supply of foreign currency. This will result in a contraction of the domestic money supply.

Under a Fixed Exchange Rate System,a Central Bank's Intervention in the Foreign