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:

Rent

Rent is the payment made by a tenant to a landlord for the use of a property, typically on a monthly basis, for residential or commercial purposes.

Prices

The amount of money required to purchase goods or services, reflecting supply and demand dynamics.

MRP Schedule

A document or chart illustrating the Marginal Revenue Product of labor, showing how much each additional unit of labor contributes to revenues.

Demand

The desire to purchase goods and services backed by the ability and willingness to pay a certain price.