Suppose That a Central Bank That Fixes Its Exchange Rate

question 153

Multiple Choice

Suppose that a central bank that fixes its exchange rate against other currencies is facing a regular increase of foreign exchange reserves. To offset unwanted changes in the domestic money supply, the central bank could

• A) reset the peg to a higher level.
• B) reduce domestic interest rates.
• C) use a sterilization policy of buying bonds or decreasing banking system reserve requirements.
• D) use a sterilization policy of selling bonds or increasing banking system reserve requirements.

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Definitions:

Exteroceptors

Sensory receptors that receive stimuli from the external environment, involved in senses such as sight, hearing, taste, smell, and touch.

Olfactory Cortex

A region of the brain involved in the processing of smell information received from the olfactory receptors.

Sensory Receptors

Specialized cells or nerve endings that respond to changes in the environment and send signals to the central nervous system.

Nasal Cavity

The large air-filled space behind the nose that filters, warms, and humidifies inhaled air.