In an economy with a fixed exchange rate and no private capital flows, financing a balance of payments
_________ requires that foreign exchange reserves must ____ .
A) deficit, fall
B) deficit, increase
C) surplus, decrease
D) balance, fall

Question

Quizplus · Accepted Answer

A balance of payments deficit under a fixed exchange rate system requires the use of foreign exchange reserves to support the domestic currency, leading to a fall in reserves.

In an Economy with a Fixed Exchange Rate and No