Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. Would it expand, contract, or not change the European money supply?

Question

Quizplus · Accepted Answer

To offset the inflationary effects of expansionary fiscal policy, the European Central Bank would contract the money supply. This action helps to reduce inflation by decreasing the amount of money in circulation, thereby increasing interest rates and reducing spending.

Suppose That the United Kingdom Pegs the Pound to the Euro