If a country's international reserves are decreasing, 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 overvalued, the quantity of the currency supplied is higher than the quantity demanded at this exchange rate. To maintain this fixed rate, the government will purchase additional currency by spending down their international reserves. This will cause a balance-of-payments deficit, which is a net decrease of in the government's stock of international reserves.

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