Mantonian franc is the currency of Mantonia, a country with a floating exchange rate system. The government of Mantonia does not directly intervene in the currency exchange. Hence, it has no direct influence on the price of the nation's currency. However, it is involved in other indirect actions such as buying currencies of other countries. Which of the following statements supports the fact that the act of buying currencies of other countries can affect the floating exchange rate?
A) The demand for the domestic currency of Mantonia decreases.
B) Mantonian franc is guaranteed to appreciate beyond a threshold amount.
C) The nation's government embraces dollarization.
D) The nation's government is obligated to print more money.

Question

Quizplus · Accepted Answer

Buying foreign currencies can lead to a decrease in demand for the domestic currency, as the government is essentially exchanging Mantonian francs for other currencies. This can affect the floating exchange rate by potentially devaluing the Mantonian franc if demand decreases.

Mantonian Franc Is the Currency of Mantonia, a Country with a Floating