Consider an Economy with a Fixed Exchange Rate and Money

question 10

Multiple Choice

Consider an economy with a fixed exchange rate and money supply equal to 2 billion pesos. The country has 1 billion in reserves and 1 billion in domestic credit. If the output in the country were to increase by 5%, then:

• A) the money demand would increase by 10%.
• B) the central bank would have to increase reserves by 5%.
• C) the central bank would have to decrease reserves by 5%.
• D) the central bank would have to decrease domestic credit.

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