If a government fixes the exchange rate so as to generate a surplus of the domestic currency, the exchange rate (U.S. dollars per unit of the other currency) will tend to _____. To maintain the fixed exchange rate, the government must _____ the domestic currency.

Question

Quizplus · Accepted Answer

If a government fixes the exchange rate to generate a surplus of the domestic currency, the exchange rate will tend to fall because the surplus indicates that the supply of the domestic currency exceeds its demand at the current exchange rate. To maintain the fixed exchange rate, the government must increase the international demand for the domestic currency, which can be achieved through various means such as raising interest rates or selling domestic assets to foreigners.

If a Government Fixes the Exchange Rate So as to Generate