If total outflows of foreign exchange exceed total inflows of foreign exchange at the current fixed exchange rate, the government would need to intervene and:
A) buy foreign exchange to maintain the exchange rate.
B) sell foreign exchange to maintain the exchange rate.
C) devalue the country's currency.
D) conduct an expansionary monetary policy.
E) conduct an expansionary fiscal policy.

Question

Quizplus · Accepted Answer

When total outflows of foreign exchange exceed total inflows, it indicates a higher demand for foreign currency than its supply at the current exchange rate. To maintain the fixed exchange rate, the government would sell foreign exchange from its reserves to meet the excess demand, thereby stabilizing the exchange rate.

If Total Outflows of Foreign Exchange Exceed Total Inflows of Foreign