Recall that the money supply equation in equation (5.9) relates only to the monetary base or stock of high-powered money. Suppose a country has no domestic credit (i.e. DC = 0), so that its monetary base is purely foreign currency reserves, FX. A system like this is called a currency board (see Section 16.4). 

Now suppose also that it has a fractional reserve banking system, as do most countries. In other words, the deposit-taking commercial banks expand the money stock by some multiple, g >1, of the monetary base, so that the money stock in the hands of the nonbank public is actually g.FX. How does this affect the conclusions of the model regarding the effect of a change in real income, y ?