随着经济活动和国内通货膨胀的下降，发展中国家的货币将倾向于对美元升值

问题如下：

QuestionA developing country, which maintains a fixed exchange rate with the US dollar, is experiencing an economic slowdown, and its inflation rate falls below the inflation level in the United States. The most likely consequence of the developing country's efforts to maintain the fixed exchange rate target is that its:

选项：

A.foreign exchange reserves will fall B.short-term interest rates will fall. C.money supply will fall

解释：

Solution

1. Incorrect. With a decline in economic activity and domestic inflation, the developing country's currency would tend to appreciate against the dollar. To uphold the fixed exchange rate target, the country's monetary authority would need to buy foreign exchange reserves and sell its own currency. This action will increase the domestic money supply, decrease short-term interest rates, and boost foreign exchange reserves.
2. Correct. With a decline in economic activity and domestic inflation, the developing country's currency would tend to appreciate against the dollar. To maintain the fixed exchange rate target, the country's monetary authority would need to buy foreign exchange reserves and sell its own currency. As a result, the domestic money supply will increase, leading to a decrease in short-term interest rates, and foreign exchange reserves will rise.
3. Incorrect. With a decline in economic activity and domestic inflation, the developing country's currency would tend to appreciate against the dollar. To preserve the fixed exchange rate target, the country's monetary authority would need to buy foreign exchange reserves and sell its own currency. This action will increase the domestic money supply, decrease short-term interest rates, and boost foreign exchange reserves.

Monetary Policy

• describe qualities of effective central banks; contrast their use of inflation, interest rate, and exchange rate targeting in expansionary or contractionary monetary policy; and describe the limitations of monetary policy

B正确。随着经济活动和国内通货膨胀的下降，发展中国家的货币将倾向于对美元升值。为了维持固定的汇率目标，该国的货币当局将需要买入外汇储备，卖出本币。因此，国内货币供应量将增加，导致短期利率下降，外汇储备将增加。