Suppose Policy Makers Are Pursuing a Policy to Fix the Exchange

question 21

Multiple Choice

Suppose policy makers are pursuing a policy to fix the exchange rate. In such a system with perfect capital mobility, an open market purchase of domestic bonds by the domestic central bank will eventually result in:

• A) a gradual decrease in the domestic interest rate.
• B) a change in the composition of the monetary base.
• C) a permanent increase in the monetary base.
• D) a permanent decrease in the monetary base.
• E) a gradual increase in the domestic interest rate.

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Definitions:

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