How a Fixed Exchange Rate Governs the Money Supply In panel (a), the equilibrium exchange rate initially exceeds the fixed level. Arbitrageurs will buy foreign currency in foreign-exchange markets and sell it to the Bank of Canada for a profit. This process automatically increases the money supply, shifting the LM* curve to the right and lowering the exchange rate. In panel (b), the equilibrium exchange rate is below the fixed level. Arbitrageurs will buy dollars in foreign-exchange markets and use them to buy foreign currency from the Bank of Canada. This process automatically reduces the money supply, shifting the LM* curve to the left and raising the exchange rate.