When market forces start to change a fixed exchange rate, the government:
A) must buy or sell currency to bring the market back to the fixed rate.
B) holds the exchange rate constant at the new equilibrium.
C) only intervenes if the change in the exchange rate would harm export-focused domestic industries.
D) None of these are true.

Question

Quizplus · Accepted Answer

When market forces start to change a fixed exchange rate, the government must intervene by buying or selling currency to bring the market back to the fixed rate. This is because a fixed exchange rate is a government-imposed policy, and the government is committed to maintaining that rate. Failing to intervene could lead to inflation, recession, and other economic problems.

When Market Forces Start to Change a Fixed Exchange Rate