If the central bank does not purchase foreign assets when output increases but instead holds the money stock constant, can it still keep the exchange rate fixed at ? Please explain with the aid of a figure
What will be an ideal response?
No, the rise in output leads to an excess demand for money. If the central bank does not increase supply to meet this demand, the domestic interest rate would rise above the foreign rate, R*. This higher rate of return (and given expectations in the foreign exchange market) would cause the exchange rate to fall below .
You might also like to view...
The chair of the Department of Economics at Colorado State University decided that office space is for tenured faculty and that graduate students are required to share cubicles. What method is used to allocate office space?
A) lottery B) majority rule C) command D) first-come, first-served E) sharing equally
Who among the following is exercising their right to pollute?
A) The group of campers burning a fire in a designated fire pit at a state forest campsite B) The Sunday morning churchgoer whose auto emits carcinogens from its exhaust pipe C) The publicly-owned and federally-regulated coal-fired electric utility D) All of the above. E) None of the above.