Question

Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. Other things equal this also causes the

a. domestic money supply to decrease and a decline in aggregate demand.
b. domestic money supply to decrease and a rise in aggregate demand.
c. domestic money supply to increase and a decline in aggregate demand.
d. domestic money supply to increase and a rise in aggregate demand.

Answer 1

c

Step-by-step explanation:

Foreign exchange is the rate at which one currency is exchange for another currency

for example : $1 = N 382.50

If a currency appreciates, it value increases

e.g. if the dollar appreciates against the naira, the exchange rate becomes $1 = N 500

If the central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency, domestic money supply increases and aggregate demand decreases. this would lead to a reduction in the value of the currency