Under a ﬁxed exchange rate regime, when will the central bank be required to purchase the domestic currency to maintain the exchange rate?

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, the central bank must intervene to maintain the exchange rate. If there is an excess supply of the domestic currency, it means that the value of the domestic currency is under downward pressure. To maintain the exchange rate, the central bank would purchase the domestic currency, using its reserves of foreign currency, to reduce the supply of the domestic currency in the market and support its value.

Under a ﬁXed Exchange Rate Regime, When Will the Central