A central bank with a fixed exchange rate must,in response to an interest rate decline in the anchor-currency economy,________.

Question

Quizplus · Accepted Answer

When there is a decline in the interest rate of the anchor currency economy, the demand for the anchor currency reduces, which leads to an increase in the supply of the domestic currency. To maintain the fixed exchange rate, the central bank must increase the demand for the anchor currency by buying it in the foreign exchange market. This will decrease the supply of the domestic currency, thereby maintaining the fixed exchange rate.

A Central Bank with a Fixed Exchange Rate Must,in Response