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.

Question

Quizplus · Accepted Answer

Under a fixed exchange standard, the exchange rate is fixed and the central monetary authority must maintain a reserve of foreign currency to meet the demand for foreign exchange. Therefore, if the domestic demand for foreign exchange increases, the central monetary authority will have to meet the demand by using its reserves. Increasing the supply of domestic money (B) is not necessary or relevant in this scenario, and the fixed exchange standard will only break down if the central monetary authorities do not have enough reserves to meet the demand for foreign exchange. Inflation (D) is not directly related to the increase in demand for foreign exchange.

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