Problem
A central bank that adopts a fixed exchange rate may sacrifice its autonomy in setting domestic monetary policy. It is sometimes argued that when this is the case, the central bank also gives up the ability to use monetary policy to combat the wage-price spiral. The argument goes like this: "Suppose workers demand higher wages and employers give in. but that the employers then raise output prices to cover their higher costs. Now the price level is higher and real balances are momentarily lower. so to prevent an interest rate rise that would appreciate the currency, the central bank must buy foreign exchange and expand the money supply. This action accommodates the initial wage demands with monetary growth and the economy moves permanently ton higher level of wages and prices. With a fixed exchange rate there is thus no way of keeping wages and prices down? What is wrong with this argument?
Economists have long debated whether the growth of dollar reserve holdings in the Bretton Woods years was "demand-determined" (that is, determined by central banks' desire to add to their international resents) or "supply detennined- (that is, determined by the speed of U.S. monetary growth). What would your answer be? What are the con-sequences for analyzing the relationship between growth in the world stock of inter-national resents and worldwide inflation?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.