Under a fixed-exchange-rate system, the central bank of a small open economy must:
A) have a reserve of its own currency, which it must have accumulated in past transactions.
B) have a reserve of foreign currency, which it can print.
C) allow the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals the announced exchange rate.
D) follow a rule specifying a constant growth rate for the money supply.

Question

Quizplus · Accepted Answer

Under a fixed-exchange-rate system, the central bank must ensure that the equilibrium exchange rate equals the announced exchange rate. This can be achieved by allowing the money supply to adjust to whatever level is necessary. Additionally, options A and B are not correct because the central bank cannot print foreign currency and does not need to have a reserve of its own currency to maintain the fixed exchange rate. Option D is also not correct because there are different rules that can be followed under a fixed exchange rate system, and a constant growth rate for the money supply may not be appropriate in all circumstances.

Under a Fixed-Exchange-Rate System, the Central Bank of a Small