Answer to Question #147662 in Economics for Muthoni

Question

Starting from a position of equilibrium in the foreign exchange market under a fixed
exchange rate regime, how must a government react to an increase in the demand for
nation’s goods and services by the rest of the world to keep the exchange rate at its fixed
value?

Answer 1

A government should increase money supply to react to an increase in the demand for nation’s goods and services by the rest of the world to keep the exchange rate at its fixed value.