Under a fixed exchange-rate system, which of the following will not occur if the demand for the local currency rises?

A) The central bank will accumulate foreign-exchange reserves.
B) The domestic money supply will increase.
C) As a result of the central bank's actions to maintain the peg, a positive item appears in the balance-of-payments statement.
D) The economy will experience an increase in inflationary pressure.

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lockita mejia · Accepted Answer

Final Answer : C, Explanation :  Under a fixed exchange rate system, the central bank will intervene in the foreign exchange market to maintain the peg. If the demand for the local currency rises, the central bank will sell foreign exchange reserves to buy local currency, which will increase the domestic money supply. This will lead to inflationary pressure in the economy. However, a positive item will not appear in the balance-of-payments statement, as the central bank's intervention will offset the increase in demand for the local currency.

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