If a country operates a fixed exchange rate, external shocks will create balance of payments surpluses or deficits that:
A) improve domestic economic performance at the expense of other countries.
B) call for changes in domestic monetary policy to defend the exchange rate.
C) are automatically accommodated by changes in fiscal policy.
D) a normal part of international transactions.

Question

Quizplus · Accepted Answer

When a country operates under a fixed exchange rate system, external shocks can lead to balance of payments surpluses or deficits. To maintain the fixed exchange rate, the country may need to adjust its domestic monetary policy, such as altering interest rates or engaging in open market operations, to influence the flow of capital and stabilize the currency value.

If a Country Operates a Fixed Exchange Rate, External Shocks