How does an expansionan expansion in the central bank's domestic assets ultimately affect its balance sheet under a fixed exchange rate? A. It leads to an equal fallfall in liabilities. B. It leads to an equal fallfall in foreign assets, without change in liabilities. C. It leads to an equal increaseincrease in foreign liabilities. D. It leads to an equal increaseincrease in domestic liabilities.

Question

Carlo Richardson

Business

31 July, 03:22

How does an expansionan expansion in the central bank's domestic assets ultimately affect its balance sheet under a fixed exchange rate? A. It leads to an equal fallfall in liabilities. B. It leads to an equal fallfall in foreign assets, without change in liabilities. C. It leads to an equal increaseincrease in foreign liabilities. D. It leads to an equal increaseincrease in domestic liabilities.

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Kathy Cooper · Answer 1

Option D

Explanation:

In simple words, A determined currency rate, also called a fixed currency value, refers to the form of exchange rate regimes during which a currency agency sets or pegs the value of the currency against both the value of yet another currencies, a combination of other currencies, or another value factor, like gold.

Thus, in order to keep the currency at a fixed level the monetary authority must increase their liability also but on a domestic level only as two accounts are considered to be separate in such systems.