Suppose a country has decided to peg to the US dollar. Explain what will need to happen if the Federal Reserve Bank engages in a temporary decrease in money supply.

If the Federal Reserve Bank engages in temporary decrease in money supply, the effect on a country that has pegged to the dollar would be minimal or negligible.

Explanation:

A dollar peg is a country or government's exchange rate policy whereby it attaches, or links, the central bank's rate of exchange to the US dollar's script. The country's central financial institution controls the currency value so that it rises and falls along with the dollar.

Because a country usually pegs its currency to a stronger one, the effect if there is a temporary decrease in money supply would be minimal. Because the value of the dollar is pegged to them and each rise and fall affects them, so a temporary decrease in money supply won't affect the value of the dollar.