Explain how a country whose currency is the reserve currency can ...

[bucstennis@aim.com]

Explain how a country whose currency is the reserve currency can use monetary policy for macroeconomic stabilization. In particular, explain the result if that country doubled its domestic money supply.
 
  What will be an ideal response?

Question 2

If a tariff on bikes causes domestic bike prices to rise by 20 and domestic value added in the domestic bike industry to rise by 30, then
 
  A) the nominal rate of protection of bikes is 20.
  B) the effective rate of protection of bikes is 30.
  C) the effective rate of protection is higher than the nominal rate.
  D) All of the above.

[nguyenhoanhat]

Answer to Question 1

The immediate result of the doubling of the money supply in the reserve currency's country will be able to increase the exchange rate between the reserve currency and all other currencies. However, all other countries must fix their exchange rate to the reserve currency, so they will purchase the reserve currency and hold it as official international reserves (thus increase their own money supply) until the exchange rate has returned to normal. Thus, the reserve country has the power to affect its own economy and all other countries must adjust in response.

Answer to Question 2

D