An economy operates under a fixed exchange rate system, pegging its domestic currency ( $X$ ) to the US Dollar ( $U S D$ ). The economy then experiences a severe negative demand shock, with global demand for its primary service export falling sharply.

To maintain the exchange rate peg, which intervention must the central bank undertake in the foreign exchange market, and what is the short-run effect of this intervention on the domestic money supply?

Sell domestic currency $X$ and buy $U S D$ reserves, leading to an expansion of the domestic money supply

Buy domestic currency $X$ and sell $U S D$ reserves, leading to an expansion of the domestic money supply

Buy domestic currency $X$ and sell $U S D$ reserves, leading to a contraction of the domestic money supply

Sell domestic currency $X$ and buy $U S D$ reserves, leading to a contraction of the domestic money supply

Sell domestic currency $X$ and buy $U S D$ reserves, leading to an expansion of the domestic money supply

Buy domestic currency $X$ and sell $U S D$ reserves, leading to an expansion of the domestic money supply

Buy domestic currency $X$ and sell $U S D$ reserves, leading to a contraction of the domestic money supply

Sell domestic currency $X$ and buy $U S D$ reserves, leading to a contraction of the domestic money supply

2.6 The international economy (A-level only)

Question 84

Markscheme

2.6 The international economy (A-level only)

Question 84

Markscheme

2.6 The international economy (A-level only)

Question 84

2.6 The international economy (A-level only) Questions

2.6 The international economy (A-level only)

Question 84

2.6 The international economy (A-level only) Questions