If an economy is following a ﬁxed exchange rate regime, its central bank's foreign currency reserves will increase when _____.

Question

Quizplus · Accepted Answer

When there is an excess demand for a country's currency in the foreign exchange market, it means that more people or entities want to buy the currency than sell it. To maintain a fixed exchange rate, the central bank will sell foreign currency reserves to meet this demand, effectively buying its own currency. This action stabilizes the exchange rate but results in an increase in the central bank's foreign currency reserves.

If an Economy Is Following a ﬁXed Exchange Rate Regime