Under a fixed exchange rate system, the central bank of a country that experiences a temporary current account deficit will most likely
A)devalue the currency
B)permit depreciation of the currency
C)sell foreign currency to keep the exchange rate from depreciating
D)buy foreign currency to influence exchange rates
E)conduct open market purchases

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, the central bank is committed to maintaining a stable exchange rate. Therefore, if the country experiences a temporary current account deficit, the central bank would most likely sell foreign currency to keep the exchange rate from depreciating. This would help to maintain the value of the country's currency and avoid a potential devaluation. Option A (devaluating the currency) and option B (permitting depreciation) would contradict the policy of a fixed exchange rate system. Option D (buying foreign currency) would be more appropriate if the country was experiencing a surplus, not a deficit. Option E (conducting open market purchases) is not directly related to the issue of maintaining a stable exchange rate in the face of a current account deficit.

Under a Fixed Exchange Rate System, the Central Bank of a Country