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

In an economy with a fixed exchange rate and no private capital flows, financing a balance of payments deficit requires that foreign exchange reserves must fall. This is because the country needs to use its reserves to support its currency's value and pay for the excess of imports over exports.

In an Economy with a Fixed Exchange Rate and No