If the fundamental value of the nominal exchange rate equals 0.20 U.S. dollars per franc, but the franc is officially fixed at 0.15 U.S. dollars per franc, then the franc exchange rate is ________ and to maintain this exchange rate there will be ________ in the government's stock of international reserves.
A)undervalued; a net decline
B)undervalued; a net increase
C)overvalued; a net increase
D)overvalued; a net decline

Question

Quizplus · Accepted Answer

Since the official fixed exchange rate of 0.15 U.S. dollars per franc is lower than the fundamental value of the nominal exchange rate of 0.20 U.S. dollars per franc, the franc is undervalued. This means that the quantity of francs supplied is less than the quantity demanded at this exchange rate. To maintain this fixed rate, the government will supply additional francs by purchasing additional international reserves. This will cause a net increase in the government's stock of international reserves.

If the Fundamental Value of the Nominal Exchange Rate Equals