A declining amount of foreign-exchange reserves resulting from maintaining a pegged exchange rate would have which of the following effects?
A) a decrease in domestic money supply
B) a negative item entry in the balance of payments statement
C) rising inﬂationary pressure
D) an increase in the supply of local currency coming from this nation's central bank

Question

Quizplus · Accepted Answer

A declining amount of foreign-exchange reserves resulting from maintaining a pegged exchange rate would lead to a decrease in domestic money supply. This is because the central bank would have to sell foreign exchange reserves to defend the peg, which would reduce the amount of foreign exchange reserves and the domestic money supply.

A Declining Amount of Foreign-Exchange Reserves Resulting from Maintaining a Pegged