To maintain a fixed exchange rate, a country:
A) cannot change its money supply.
B) must constantly increase its money supply.
C) must constantly decrease its money supply.
D) Maintaining a fixed exchange rate is unrelated to the money supply.

Question

Quizplus · Accepted Answer

When a country wants to maintain a fixed exchange rate, it must not change its money supply. This is because if the country increases its money supply, it can lead to inflation which could devalue its currency and destabilize the exchange rate. On the other hand, if the country decreases its money supply, it could cause deflation and a rise in interest rates which can also destabilize the exchange rate. Therefore, in order to maintain a fixed exchange rate, the country must keep its money supply constant.

To Maintain a Fixed Exchange Rate, a Country