If the central bank pegs the exchange rate above its free-market equilibrium level,there will be an ________ of/for foreign exchange,and the central bank will ________ foreign currency.

Question

Quizplus · Accepted Answer

When the central bank pegs the exchange rate above its free-market equilibrium level, it makes the domestic currency artificially expensive, leading to an excess supply of foreign exchange as fewer people want or can afford to buy the expensive domestic currency. To maintain this pegged rate, the central bank will purchase foreign currency, using its reserves to buy the excess supply and support the domestic currency's artificially high value.

If the Central Bank Pegs the Exchange Rate Above Its