Refer to Figure 15.3 for the following questions.
Figure 15.3

-Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per United States (US)dollar, as shown in Figure 15.3. If the Thai central bank pursues a contractionary monetary policy, how will that affect the number of baht the central bank must buy or sell to maintain the peg at 0.04 baht per US dollar?
A)They must purchase more than 100 million baht per day with US dollars.
B)They must purchase less than 100 million baht per day with US dollars.
C)They must purchase exactly 100 million baht per day with US dollars.
D)They do not have to do anything.

Question

Refer to Figure 15.3 for the following questions.
Figure 15.3
 
-Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per United States (US)dollar, as shown in Figure 15.3. If the Thai central bank pursues a contractionary monetary policy, how will that affect the number of baht the central bank must buy or sell to maintain the peg at 0.04 baht per US dollar?
A)They must purchase more than 100 million baht per day with US dollars. 
B)They must purchase less than 100 million baht per day with US dollars. 
C)They must purchase exactly 100 million baht per day with US dollars. 
D)They do not have to do anything.

Quizplus · Accepted Answer

If the Thai central bank pursues contractionary monetary policy, it will decrease the supply of baht in the market, which will lead to an increase in the demand for baht. This increase in demand for baht will lead to an appreciation of the baht, causing it to become stronger relative to the US dollar. As a result, the central bank will have to purchase less than 100 million baht per day with US dollars to maintain the exchange rate peg of 0.04 baht per US dollar.

Refer to Figure 15.3 for the Following Questions