If a country has an external deficit, intervention in the foreign exchange market by the central bank will create a new equilibrium if the central bank buys foreign exchange.

Question

Quizplus · Accepted Answer

If a country has an external deficit, the central bank would typically sell foreign exchange to support its currency, not buy it. Buying foreign exchange would increase the deficit by further weakening the domestic currency.

If a Country Has an External Deficit, Intervention in the Foreign