A speculative attack on a country with a fixed exchange rate occurs when:

Question

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In a fixed exchange rate system, the government guarantees to maintain the value of its currency in terms of a certain benchmark currency or a commodity such as gold. If financial market participants believe that the government will have to devalue its currency, they may engage in a speculative attack by selling the currency short and buying the benchmark currency or commodity. This can create a self-fulfilling prophecy as the government may not be able to defend the exchange rate, leading to a devaluation.

A Speculative Attack on a Country with a Fixed Exchange