Under a fixed exchange-rate system, if the equilibrium exchange rate is continually and substantially below the fixed rate, that means that the local currency is overvalued relative to equilibrium. In this case, which of the following will not be a result of the central bank's actions to maintain the peg?

Question

Quizplus · Accepted Answer

To maintain the peg when the local currency is overvalued, the central bank will sell foreign reserves and buy local currency, which decreases FX reserves and domestic money supply, potentially increasing inflationary pressure. The value of the local currency is not forced down; it is artificially supported.

Under a Fixed Exchange-Rate System, If the Equilibrium Exchange Rate