Refer to Figure 15.3 for the following questions.
Figure 15.3

-Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per United States (US)dollar, as shown in Figure 15.3. If currency speculators think that the Thai government will soon allow the currency to float, how will that affect the number of baht the central bank must buy or sell to maintain the peg at 0.04 baht per US dollar?
A)They must purchase more than 100 million baht per day with US dollars.
B)They must purchase less than 100 million baht per day with US dollars.
C)They must purchase exactly 100 million baht per day with US dollars.
D)They do not have to do anything.

Question

Refer to Figure 15.3 for the following questions.
Figure 15.3
 
-Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per United States (US)dollar, as shown in Figure 15.3. If currency speculators think that the Thai government will soon allow the currency to float, how will that affect the number of baht the central bank must buy or sell to maintain the peg at 0.04 baht per US dollar?
A)They must purchase more than 100 million baht per day with US dollars. 
B)They must purchase less than 100 million baht per day with US dollars. 
C)They must purchase exactly 100 million baht per day with US dollars. 
D)They do not have to do anything.

Quizplus · Accepted Answer

If currency speculators think that the Thai government will soon allow the currency to float, they will sell off their baht holdings in anticipation of a drop in value. This will lead to a decrease in demand for baht and an increase in demand for U.S. dollars. As a result, the Thai central bank will have to purchase more than 100 million baht per day with U.S. dollars to maintain the fixed exchange rate of 0.04 baht per U.S. dollar.

Refer to Figure 15.3 for the Following Questions