We discuss rules of the game: The selling of domestic assets to acquire money when gold exited the country as payments for imports. This decreased the money supply and increased interest rates, attracting financial inflows to match a current account deficit.

Traditionally, central bank cannot affects the interest rate under fixed exchange rate system. However, in the more realistic imperfect asset subsitutability framework =(B-A), the central bank can affect the interest rate level.

Use a diagram like Figure 18-7 (in our slides) or 18-6 in our textbook to explain how a central bank can alter the domestic interest rate, while holding the exchange rate fixed, under imperfect asset substitutability.