In early May 1971, Germany was forced to purchase several billion US dollars to maintain the value of the dollar in terms of the mark. Eventually, the Bundesbank floated the mark. An explanation for this sudden change of events, as well as the ultimate policy taken by the German central bank is:

A) People expected that the Bundesbank would not be able to defend the fixed dollar-mark rate and this drove the expected nominal return (expressed in dollars) of mark denominated assets up. The Bundesbank was then forced with 2 options - increase the money supply or let the mark float. B) People expected that the Bundesbank would not be able to defend the fixed dollar-mark rate, and this drop down the expected nominal return (expressed in dollars) of mark denominated assets. The Bundesbank was then forced with 2 options -sell off dollars and decrease the money supply or let the mark float. C) People anticipated that Nixon was about to impose wage-and-price controls. This led them to want to acquire marks in order now in order to convert to dollars in the future and be able to purchase US goods at much lower prices. D) People anticipated that Nixon was about to impose wage-and price controls. This would have led to a sizable real depreciation of the German real exchange rate, and German Goods would have been then cheaper. Seeing this, individuals wanted to acquire marks. The Bundesbank was then forced with 2 options increase the money supply or let the mark float.

E. None of the above.

Under a fixed exchange rate system, countries other than the reserve currency country might be forced to import inflationary monetary policies of the reserve currency country. An explanation for this is: A. As prices in the reserve currency country rise, rices of goods exported to the non-reserve currency countries by the reserve country must rise. Prices in the non-reserve countries must then rise to maintain a fixed exchange

B. As prices in the reserve currency country rise, the current account in other countries will improve. This raises incomes as well as interest rates in countries other than the reserve currency country. The central banks in these countries will then be forced to lower domestic interest rates in order to maintain their fixed parity with the reserve currency. C. Rising prices in the reserve currency country means that gold prices in that country have also risen. This means that prices in the other countries must also rise in order to maintain a constant fixed price of gold in terms of these other currencies A Rising prices in the reserve currency country means that gold prices in that country nave also risen. his means that gold prices in the other countries must fall (or prices of goods must rise) in order to maintain a constant fixed exchange rate E. Higher prices in the reserve currency country mean greater prosperity in that country. They then import more goods, and this drives up foreign prices