Which of the following is true of a ﬁxed exchange rate regime?

Question

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A fixed exchange rate regime requires the government to maintain the value of its currency relative to a reference currency or a basket of currencies. This often necessitates the government to follow financial discipline to ensure that its currency remains at the fixed exchange rate, including maintaining adequate foreign exchange reserves and possibly implementing monetary and fiscal policies that support the fixed rate. Choices A, B, and D are not inherently true of a fixed exchange rate regime; for example, it does not allow for gradual adjustments (which would be more characteristic of a managed float regime), it aims to reduce rather than increase volatility, and while it may aim to prevent speculative attacks, history has shown that fixed rates can sometimes invite speculation if investors believe the fixed rate is unsustainable.

Which of the Following Is True of a ﬁXed Exchange