Saudi Arabia pegs its currency (the riyal, or SAR) to the U.S. dollar. Currently, the exchange rate is SAR3.75 = $US1. Suppose that the Saudi Arabian money multiplier is 1. By how much will the Saudi Arabian money supply change when the Saudi central bank buys $1 million of additional reserves?

Question

Quizplus · Accepted Answer

Since the money multiplier is 1 and the exchange rate is SAR3.75 = $US1, the central bank can create SAR3.75 of new money for every $1 of additional reserves. Therefore, the purchase of $1 million in reserves will lead to an increase in the Saudi Arabian money supply by SAR3.75 million.

Saudi Arabia Pegs Its Currency (The Riyal, or SAR) to the U.S