Under a fixed exchange rate system, a government is at risk of running out of foreign currency reserves when the country's imports exceed its exports.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, the government has to maintain a certain level of foreign currency reserves to ensure that it can always supply enough of its currency to maintain the fixed exchange rate. If the country's imports exceed its exports, it will have to use some of its foreign reserves to pay for the excess imports, potentially leading to a depletion of its foreign currency reserves.

Under a Fixed Exchange Rate System, a Government Is at Risk