When output falls or the foreign rate of interest rises, what must the central bank do and why?
A) It must sell foreign currency reserves for its own currency to raise rates of interest and decrease the supply of money.
B) It must buy foreign currency reserves with its own currency to lower rates of interest and increase the supply of money.
C) It must resist the temptation to do something immediately and let the situation work itself out.
D) It must ask the domestic government to issue more bonds to raise domestic rates of interest.

Question

Quizplus · Accepted Answer

When output falls or the foreign rate of interest rises, the central bank may sell foreign currency reserves for its own currency to raise domestic interest rates and decrease the money supply, stabilizing the currency and controlling inflation.

When Output Falls or the Foreign Rate of Interest Rises