With fixed exchange rates,assume that the home currency becomes undervalued.To maintain the fixed exchange rate,the home country's central bank must
A) purchase the currency,and as a result it loses international reserves
B) purchase the currency,and as a result it gains international reserves
C) sell the currency,and as a result it loses international reserves
D) sell the currency,and as a result it gains international reserves

Question

Quizplus · Accepted Answer

If the home currency becomes undervalued, it means that it is worth less than the fixed exchange rate. To maintain the fixed exchange rate, the central bank must sell its own currency and buy foreign currency. This will increase the demand for the home currency in the international market and make it appreciate. As a result, the central bank will gain international reserves.

With Fixed Exchange Rates,assume That the Home Currency Becomes Undervalued