When exchange rates are fixed by central bankers,international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

Question

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When exchange rates are fixed, the central banks need to hold international reserves to finance any imbalances in payments and to stabilize the exchange rates. This is because they cannot rely on the market forces of supply and demand to adjust the exchange rates, as they are fixed. Therefore, maintaining sufficient international reserves is necessary in such a scenario.

When Exchange Rates Are Fixed by Central Bankers,international Reserves Are