If a country that fixes its exchange rate has an undervalued exchange rate,then it will ________ reserves,unless it ________ its money supply to the appropriate level.
A)gain; increases
B)lose; increases
C)lose; decreases
D)gain; decreases

Question

Quizplus · Accepted Answer

If a country has an undervalued exchange rate, it means that its currency is cheaper than it should be, leading to higher demand for its exports. This increases the inflow of foreign currency, causing the country to gain reserves. To maintain the fixed exchange rate, the country needs to increase its money supply to match the increased demand for its currency, preventing the currency from appreciating.

If a Country That Fixes Its Exchange Rate Has an Undervalued