Assume perfect capital mobility and fixed exchange rates.If the central bank increases money supply,it must also ________,which will ________.
A) Buy foreign currency, have no effect on the money supply
B) Buy foreign currency, increase the money supply
C) Buy domestic currency, increase the money supply
D) Buy domestic currency, decrease the money supply

Question

Quizplus · Accepted Answer

Under fixed exchange rates and perfect capital mobility, increasing the money supply would lead to downward pressure on the exchange rate. To maintain the fixed rate, the central bank must buy domestic currency, which decreases the money supply, counteracting the initial increase.

Assume Perfect Capital Mobility and Fixed Exchange Rates