Suppose that Econland adopts a fixed exchange-rate system and pegs the value of its peso to the U.S. dollar. If Econlanders' demand for dollars increases in the foreign exchange markets, then Econland's foreign-exchange reserves will
A)increase.
B)decrease.
C)stay the same.
D)equal the trade balance.

Question

Quizplus · Accepted Answer

To maintain a fixed exchange rate, Econland's central bank must sell dollars and buy pesos when the demand for dollars increases. This action decreases Econland's foreign-exchange reserves.

Suppose That Econland Adopts a Fixed Exchange-Rate System and Pegs