Assume the Money Supply Is Backed by Bonds and Reserves

Multiple Choice

Assume the money supply is backed by bonds and reserves, and the exchange rate is pegged. If the domestic demand for money falls, what happens to the level of bonds and reserves?

A) The level of bonds and reserves both rise.
B) The level of bonds stays the same, while the level of reserves falls.
C) The level of bonds rises, while the level of reserves falls.
D) The level of bonds falls and the level of reserves rises.