Under a fixed exchange rate regime with no private currency movements, what happens to the domestic money supply when the central bank purchases its own currency?

Multiple choice question for Macroeconomic Issues and Analysis. Select an option, then review the explanation below.

Explanation

When the central bank buys domestic currency under fixed exchange rates without private currency flows, it withdraws money from circulation, leading to a reduction in the domestic money supply.

Practice related questions from the same subject.

1.Which of the following is NOT considered an advantage of the single market?
2.Within the European Exchange Rate Mechanism (ERM), each member country maintained a fixed exchange rate, and together the group ________ in relation to other countries worldwide?
3.In a country with a floating exchange rate system, what is the likely effect on its currency if its inflation rate exceeds that of its trading partners?
4.In a floating exchange rate system, how do expectations of rising interest rates typically affect the currency's exchange rate?
5.How does a fixed exchange rate combined with full capital mobility affect the effectiveness of monetary policy?

Under a fixed exchange rate regime with no private currency movements, what happens to the domestic money supply when the central bank purchases its own currency?

Explanation

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