When Output Falls or the Foreign Rate of Interest Rises

Multiple Choice

When output falls or the foreign rate of interest rises, what must the central bank do and why?

A) It must sell foreign currency reserves for its own currency to raise rates of interest and decrease the supply of money.
B) It must buy foreign currency reserves with its own currency to lower rates of interest and increase the supply of money.
C) It must resist the temptation to do something immediately and let the situation work itself out.
D) It must ask the domestic government to issue more bonds to raise domestic rates of interest.