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Suppose the central bank of a small country with a fixedexchange rate is faced by...

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Economics

Suppose the central bank of a small country with a fixedexchange rate is faced by a fall in the world interest rate, \(\mathrm{R}^{*} \). This would lead to in foreign reserve holdings.This change in reserves will in turn lead to in the home country'smoney supply. Can this small country offset either of these effectsthrough domestic open-market operations? (Assume all assets areperfect substitutes.) A. Yes, by making the domestic interest ratebe equal to \( \mathrm{R}^{*} \). B. Yes, through an increase indomestic money supply. C. Yes, through a decrease in domestic moneysupply. D. No, it cannot.

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