Consider an Economy with a Fixed Exchange Rate and Money

question 112

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 as a result of some exogenous events, foreign interest rate increases, then the central bank in the home country:

• A) will have to decrease the reserves to maintain the peg.
• B) will have to decrease the domestic assets.
• C) will have to increase the reserves to maintain the peg.
• D) will do nothing.

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Definitions:

Loss of Sale

A situation where a potential transaction does not occur, resulting in no revenue from that potential customer.

Competitor

A business or individual that competes in the same industry or field as another, offering similar products or services.

Potential Sales

The possible future sales achievable in a given market segment or with a certain customer base, often used in forecasting.

Time Invested

The amount of time one dedicates to a particular activity, project, or goal, often with the expectation of future benefits.