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, the central bank's FX reserves will rise, and in response it has the following options, except

Question

Quizplus · Accepted Answer

If the local currency is overvalued, the central bank's FX reserves will not rise; they will fall as the central bank sells foreign currency to maintain the peg. Therefore, waiting for the local currency to rise is not a viable option.

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