Which of the following describes the role of the government in a fixed exchange rate regime?
A) establishing capital controls
B) controlling budget deficits
C) the buying and selling of currency by the central bank
D) expanding the money supply

Question

Quizplus · Accepted Answer

In a fixed exchange rate regime, the government plays a key role in maintaining the exchange rate by buying and selling its currency in the foreign exchange market through its central bank. This helps to stabilize the exchange rate at a predetermined level. Establishing capital controls (A) and controlling budget deficits (B) can also help to maintain the fixed exchange rate, but they are not the primary role of the government in such a regime. Expanding the money supply (D) could cause inflation and negatively affect the fixed exchange rate, so it is not a desirable action for the government to take in this situation.

Which of the Following Describes the Role of the Government