Which of the following methods would the central bank NOT use to keep the exchange value of its currency fixed?
A) It would purchase its own currency for foreign reserves when the domestic credit expanded.
B) It would sell its own currency for foreign reserves when domestic credit contracted.
C) It would ensure that the domestic money supply stayed constant to maintain uncovered interest and PPP.
D) It would ensure that the domestic money supply increased to maintain PPP.

Question

Quizplus · Accepted Answer

Maintaining a fixed exchange rate requires the central bank to intervene in the foreign exchange market through the purchase or sale of its own currency. Choices A and B describe methods of intervention. Choice C describes a possible policy goal in maintaining a fixed exchange rate. However, increasing the domestic money supply to maintain PPP would put upward pressure on prices and render the fixed exchange rate unsustainable. Therefore, choice D is the method the central bank would NOT use.

Which of the Following Methods Would the Central Bank NOT