In an economy with a _________ exchange rate but no private ______________, financing a balance of
Payments deficit requires that foreign exchange reserves must decrease.
A) flexible, capital flows
B) fixed, capital flows
C) fixed, income flows
D) flexible, income flows

Question

Quizplus · Accepted Answer

In a fixed exchange rate system without private capital flows, the only way to finance a balance of payments deficit is by using foreign exchange reserves. This is because the fixed exchange rate must be maintained by the central bank, and without private capital flows to offset the deficit, the central bank has to sell its foreign exchange reserves to support the domestic currency.

In an Economy with a _________ Exchange Rate but No