Fixed exchange Rate

Fixed exchange Rate:

When a country is on a fixed exchange rate system, on the other
hand, a balance of payment surplus or deficit will result in a change
in the domestic money supply.

Starting off again with a balance of payment surplus, the excess
supply of domestic currency (or excess demand for domestic
currency) would have resulted in an appreciation of the domestic
currency. To keep the exchange rate fixed, the central bank will
intervene and it will buy foreign currency . This increases the
central banks’ reserves of foreign currency. Money supply in the
country likewise increases as more domestic currency is placed on
the market.