Monetary Policy and Its Impact on Capitalia's Economy

The Impact of Myopia's Inflation Problem on Capitalia

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Question

The nation of Myopia is having a massive inflation problem. To stabilize prices, the Myopian Central Bank decides to acquire large numbers of Capitalian Dollars

(a very stable currency) and offer to exchange five Myopian Pesos for one Capitalian Dollar on demand. How does this impact the monetary base and the effective money supply for the nation of Capitalia?

Answers

A. both decrease

B. no change, decrease

C. decrease, increase

D. no change, increase

E. no change for either

F. both increase

G. increase, decrease B

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Explanations

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A. B. C. D. E. F. G.

Explanation

The monetary base is made up of currency and bank reserves. In this case, Myopia has taken large amounts of currency out of circulation in Capitalia, but the expatriated currency is technically still part of the monetary base. Therefore the base has not changed, but the effective money in circulation has decreased. This is one of the problems economists face in attempting to measure the real money supply.

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