Under a fixed exchange-rate system, which of the following statements is true?

Question

Quizplus · Accepted Answer

If the peg overvalues the local currency, it makes imports cheaper and exports more expensive, which will cause a trade deficit that puts pressure on the central bank to devalue the currency. On the other hand, if the peg undervalues the local currency, it makes exports cheaper and imports more expensive, which leads to a trade surplus and an inflow of foreign currency that the central bank can use to maintain the peg. Therefore, a peg that undervalues the currency is easier to maintain.

Under a Fixed Exchange-Rate System, Which of the Following Statements