For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that an increase in stock market wealth causes an increase in consumption.Which of the following will tend to occur in a fixed exchange rate regime?
A)an increase in Y
B)an increase in the money supply
C)no change in the domestic interest rate
D)all of the above

Question

Quizplus · Accepted Answer

In a fixed exchange rate regime, an increase in consumption typically leads to an increase in aggregate demand and output (Y), necessitating an increase in the money supply to maintain the fixed exchange rate. Central banks may intervene in the foreign exchange market to keep the exchange rate fixed, which can involve adjusting the domestic money supply. Additionally, to maintain the fixed exchange rate, the domestic interest rate often aligns with the foreign interest rate, implying adjustments to the domestic interest rate to prevent capital flows that could disrupt the fixed exchange rate. However, in the context of maintaining a fixed exchange rate, the central bank's actions to adjust the money supply can offset pressures on the domestic interest rate, aiming to keep it stable in line with the fixed exchange rate policy. Thus, all of the mentioned effects can occur under a fixed exchange rate regime when there's an increase in consumption driven by an increase in stock market wealth.

For This Question,assume That Policy Makers Are Pursuing a Fixed