Under a system of fixed exchange rates,what happens if a country's currency is overvalued?
A)The Central Bank loses official reserve assets.
B)The Central Bank gains official reserve assets.
C)The currency appreciates.
D)The exchange rate rises.

Question

Quizplus · Accepted Answer

If a country's currency is overvalued, this means that its exchange rate is higher than it should be based on the country's economic fundamentals. In order to maintain the fixed exchange rate, the Central Bank will have to sell its own currency and buy foreign currencies. This will lead to a decrease in official reserve assets, as the Central Bank's holdings of foreign currencies will increase while its holdings of domestic currency will decrease.

Under a System of Fixed Exchange Rates,what Happens If a Country's