Under a fixed exchange rate, if demand for foreign currency exceeds supply at the official rate:
A) the central bank buys foreign exchange with domestic currency.
B) the central bank sells foreign exchange for domestic currency.
C) the central bank allows the market to establish a new equilibrium exchange rate.
D) the central bank announces a new inflation target.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, if the demand for foreign currency exceeds the supply at the official rate, the central bank intervenes by selling foreign exchange for domestic currency to maintain the fixed rate. This action increases the supply of foreign currency in the market, helping to meet the excess demand and stabilize the exchange rate at the official level.

Under a Fixed Exchange Rate, If Demand for Foreign Currency