If there is an excess supply of the domestic currency at a fixed exchange rate,
A) the currency will undergo a devaluation
B) the currency will appreciate
C) the country must switch to a floating exchange rate
D) the central bank must buy up that excess supply or the exchange rate will fall
E) the central bank must be up that excess supply or the exchange rate will rise

Question

Quizplus · Accepted Answer

If there is an excess supply of the domestic currency at a fixed exchange rate, the central bank must buy up that excess supply or the exchange rate will fall. This is because an excess supply of the domestic currency will lead to a decrease in demand for it, resulting in a decline in its value in relation to the foreign currency. In order to maintain the fixed exchange rate, the central bank must intervene in the foreign exchange market by purchasing the excess amount of the domestic currency. This will increase the demand for the local currency and help maintain the fixed exchange rate.

If There Is an Excess Supply of the Domestic Currency