QuestionJuly 20, 2025

In a pure flexible exchange rate system, the foreign exchange market: A. has no direct effect on the money supply because there is no central bank intervention. B. has a direct effect on the money supply because domestic currency is bought and sold in exchange for foreign currency. C. may or may not have an effect on the money supply.

In a pure flexible exchange rate system, the foreign exchange market: A. has no direct effect on the money supply because there is no central bank intervention. B. has a direct effect on the money supply because domestic currency is bought and sold in exchange for foreign currency. C. may or may not have an effect on the money supply.
In a pure flexible exchange rate system, the foreign exchange market:
A. has no direct effect on the money supply because there is no central bank intervention.
B. has a direct effect on the money supply because domestic currency is bought and sold in exchange for foreign currency.
C. may or may not have an effect on the money supply.

Solution
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Answer

A. has no direct effect on the money supply because there is no central bank intervention. Explanation 1. Identify the characteristics of a pure flexible exchange rate system In a pure flexible exchange rate system, exchange rates are determined by market forces without central bank intervention. 2. Analyze the effect on money supply Since there is no central bank intervention, changes in the foreign exchange market do not directly affect the domestic money supply.

Explanation

1. Identify the characteristics of a pure flexible exchange rate system<br /> In a pure flexible exchange rate system, exchange rates are determined by market forces without central bank intervention.<br />2. Analyze the effect on money supply<br /> Since there is no central bank intervention, changes in the foreign exchange market do not directly affect the domestic money supply.
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