If a nation wants to maintain a fixed exchange rate at a time when supply and demand are causing an excess of imports over exports, the nation might

Question

Quizplus · Accepted Answer

A more restrictive monetary policy would decrease the supply of money and increase interest rates, which would make it more expensive for individuals and businesses to borrow money to purchase imports. This would help decrease demand for imports and increase demand for exports, helping the country maintain its fixed exchange rate. Shifting to a more expansionary monetary policy could cause inflation and potentially harm the economy in the long run. Reducing trade barriers or taxing exports and subsidizing imports would not directly address the issue of excess imports and may not be effective in maintaining the fixed exchange rate.

If a Nation Wants to Maintain a Fixed Exchange Rate