Suppose a Central Bank Prevents an Appreciation of Its Currency

question 71

Multiple Choice

Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency.This causes the

• A) domestic money supply to decrease and a decline in aggregate demand
• B) domestic money supply to increase and a decline in aggregate demand
• C) domestic money supply to decrease and a rise in aggregate demand
• D) domestic money supply to increase and a fall in aggregate demand

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Definitions:

Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a theoretical framework used to determine the expected return on an investment, factoring in risk and the time value of money.

Security Market Line

The Security Market Line (SML) is a graphical representation in financial markets that depicts the expected rate of return of an investment as a function of its systematic, or market, risk, as measured by beta.

Capital Market Line

A line used in the Capital Asset Pricing Model to illustrate the rates of return for efficient portfolios depending on the level of risk free rate and the level of market risk.

Market Portfolio

A theoretical portfolio that includes all assets in the market, with each asset weighted according to its market capitalization.