To maintain a ﬁxed exchange rate under a shortage of FX reserves, the government has the following options, except
A) encourage foreign investment inﬂows, and restrict foreign investment outﬂows.
B) encourage imports, and discourage exports.
C) impose exchange controls or capital controls.
D) use monetary or ﬁscal policies to reduce domestic spending.

Question

Quizplus · Accepted Answer

Encouraging imports and discouraging exports would increase outflows of foreign currency, making it more difficult to maintain a fixed exchange rate. Options A, C, and D would help increase FX reserves or reduce the need for them, making it easier to maintain the fixed exchange rate.

To Maintain a ﬁXed Exchange Rate Under a Shortage of FX