Under a fixed exchange rate system, when total inflows of foreign exchange exceed total outflows of foreign exchange at the current fixed exchange rate:
A) the central bank would buy foreign exchange causing the economy to contract.
B) the central bank would sell foreign exchange causing the economy to contract.
C) the central bank would buy foreign exchange causing the economy to expand.
D) the central bank would sell foreign exchange causing the economy to expand.
E) the central bank would buy foreign exchange and cause the price level to rise.

Question

Quizplus · Accepted Answer

EWhen total inflows of foreign exchange exceed total outflows at the current fixed exchange rate, the central bank intervenes to maintain the fixed rate. It does so by buying the excess foreign exchange, which increases the domestic money supply, potentially causing the economy to expand (C) and the price level to rise (E).

Under a Fixed Exchange Rate System, When Total Inflows of Foreign