How does the Central Bank of a country intervene to control the money supply in the presence of fixed exchange rates?

How does the Central Bank of a country intervene to control the money supply in the presence of fixed exchange rates? 

Ans. Two situations can take place. 

(a) When Demand for currency is more than supply, it will lead to excess demand for foreign currency. In this case, central bank will sell foreign exchange out of its reserves. It will decrease money supply and keep exchange rate fixed at official level. 

(b) When Demand for currency is less than supply, it will lead to excess supply for foreign currency. In this case, central bank will buy foreign exchange out of its reserves. It will increase money supply and keep exchange rate fixed at official level. As long as central bank can afford to buy and sell forex from its reserves, it can maintain fixed exchange rate. If it does not sufficient reserves, the fixed exchange rate system will flop.