If a country's international reserves are increasing, then its exchange rate is ________ and there is a balance-of-payments ________.
A)undervalued; surplus
B)undervalued; deficit
C)overvalued; deficit
D)overvalued; surplus

Question

Quizplus · Accepted Answer

When a currency is undervalued, the quantity of the currency supplied is lower than the quantity demanded at this exchange rate. To maintain the fixed rate, the government will supply additional currency by buying international reserves. This will cause a balance-of-payments surplus, which is a net increase of in the government's stock of international reserves.

If a Country's International Reserves Are Increasing, Then Its Exchange