If Rising Inflation in an Economy with Fixed Exchange Rates

question 80

Multiple Choice

If rising inflation in an economy with fixed exchange rates puts downward pressure on the value of the currency, what action must the government take to maintain fixed exchange rates?

• A) lower interest rates to attract more borrowers to the country
• B) buy up more foreign currency, using money that it prints
• C) print more domestic currency to maintain an adequate supply of money
• D) buy up its own currency using foreign reserves

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Definitions:

Foreign Producers

Companies or entities that manufacture goods or provide services outside the country of sale.

Domestic Supply

The total amount of goods and services produced within a country's borders, available for domestic consumption or export.

Demand Schedules

Tabulated data showing the quantity of a good or service that consumers are willing and able to purchase at different price levels over a specified period of time.

World Price

The global market price of a good or service, influenced by worldwide demand and supply.