With flexible exchange rates,central banks do not have to finance deficits because BOP equilibrium is restored by changes in exchange rates.

Question

Quizplus · Accepted Answer

When a country has flexible exchange rates, the central bank does not have to intervene in the foreign exchange market to maintain the value of the currency. If a country runs a deficit or surplus, the exchange rate will adjust accordingly to restore balance in the balance of payments. Thus, the central bank does not need to finance deficits through intervention in the foreign exchange market.

With Flexible Exchange Rates,central Banks Do Not Have to Finance