Refer to Figure 20.5 for the following questions.
Figure 20.5
-Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per US dollar,as shown in Figure 20.5.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 20.5 for the following questions.
Figure 20.5 
-Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per US dollar,as shown in Figure 20.5.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

A contractionary monetary policy would likely increase interest rates, attracting foreign capital and increasing demand for the baht. This would cause the baht to appreciate, so the central bank would need to purchase less baht to maintain the peg.

Refer to Figure 20.5 for the Following Questions