Consider an Economy with a Fixed Exchange Rate and Money

Multiple Choice

Consider an economy with a fixed exchange rate and money supply equal to 2 billion pesos. The country has 1 billion in reserves and 1 billion in domestic credit. If as a result of some exogenous events, foreign interest rate increases, then the central bank in the home country:

A) will have to decrease the reserves to maintain the peg.
B) will have to decrease the domestic assets.
C) will have to increase the reserves to maintain the peg.
D) will do nothing.