Suppose that the Fed increases the U.S.money supply and the Bretton Woods system of fixed exchange rates is still in place.Then to maintain the fixed exchange rate,foreign central banks intervene by:
A) Raising the interest rate on dollars.
B) Buying dollars and selling its currency.
C) Raising the interest rate on its currency.
D) Selling dollars and buying its currency.

Question

Quizplus · Accepted Answer

Under the Bretton Woods system of fixed exchange rates, if the Fed increases the U.S. money supply, the value of the dollar would tend to decrease relative to other currencies. To maintain the fixed exchange rate, foreign central banks would intervene by buying dollars and selling their own currency. This action increases the demand for dollars, helping to maintain its value relative to other currencies.

Suppose That the Fed Increases the U