If a government fixes the exchange rate _____ the market equilibrium, there will be a shortage of the domestic currency and a tendency for the exchange rate (U.S. dollars per unit of the other currency) to _____.

Question

Quizplus · Accepted Answer

When a government fixes the exchange rate below the market equilibrium, it sets the price of its currency too low, leading to excess demand for the domestic currency. This imbalance causes the exchange rate (when measured in U.S. dollars per unit of the other currency) to rise as the market pressures push towards equilibrium.

If a Government Fixes the Exchange Rate _____ the Market