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The Republic of Gizmovia wants to maintain the exchange rate of its currency,the gizmo,at $0.50,but the current exchange rate for the gizmo is $0.40.
-(Scenario: Gizmovia)Refer to Scenario: Gizmovia.If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50,it should _____ interest rates by _____ the money supply.

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Quizplus · Accepted Answer

To increase the exchange rate of the gizmo, Gizmovia needs to decrease the supply of its currency. This can be achieved through a contractionary monetary policy, which involves increasing interest rates to reduce demand for money and thus the supply of money in the economy. Therefore, the correct answer is to increase interest rates by decreasing the money supply, which is given in option D.

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