Fixed exchange rate 2

A balance of payment deficit on the other hand, results in an
excess demand for foreign currency. To prevent the domestic
currency from depreciating, the central bank intervenes by selling
foreign currency in the foreign currency market. This reduces the
central bank’s reserves of foreign currency and also the money
supply in the country as the domestic currency in now no longer in
the domestic market.

Under a fixed exchange rate system, the money supply equation
becomes:

Ms = m x (Hd + Hf)
where: Hd is the domestic component of high-powered money
Hf is the foreign component (include gold, foreign
currencies)

The central banks has control over Hd but not Hf as the latter
depends on the external surplus or deficit.