fixed exchange rate :
Monetary policy

1. An expansionary monetary,
means increasing money supply,
as central banks purchase 
domestic bonds, injecting 
money into the economy.
so MS > MD = Excess supply
of money will cause the LM 
curve to shift to the right, 
This shift moves the 
equilibrium from point 
E0 to E1.
Increasing money supply 
leads to decrease of 
domestic interest rate (i)

2. A shift in LM curve cause
a BP deficit and i < i*, 
there is capital outflow, 
because investor seek higher
returns in foreign assets,
domestic investors sell home
currency and buy foreign curr

and because exchange
rate is fixed, the domestic
interest rate must be equal
to the world interest rate
(i = i*) due to the 
IUP. To maintain this 
parity, central banks must 
intervene in the foreign 
exchange market, using their
reserves ("Delta R") to 
purchase domestic currency 
and sell foreign currency.
delta R < 0

This action decreases the 
money supply, shifting the 
LM curve back to its original
position, moving the 
equilibrium from E1 to E0

3. monetary policy becomes
ineffective under a fixed 
exchange rate regime 
because any attempt to 
stimulate the economy 
through expansionary 
measures is countered by 
the need to maintain the 
fixed exchange rate. The 
constant intervention in 
the foreign exchange market
neutralizes the effects of
monetary policy