To fix the exchange rate (foreign currency price of domestic currency) above the free market equilibrium exchange value, a government must
A) sell its own currency and buy foreign currency.
B) buy its own currency and sell foreign currency.
C) buy both its own currency and foreign currency.
D) sell both its own currency and foreign currency.
E) devalue its own currency relative to other monies.

Question

Quizplus · Accepted Answer

When a government wants to fix the exchange rate above the free market equilibrium exchange value, it needs to buy its own currency in the foreign exchange market and sell the foreign currency. This increases the demand for its own currency and thus strengthens its value relative to the foreign currency, leading to a higher exchange rate. Therefore, option B is the correct answer. Option A would have the opposite effect and lead to a lower exchange rate. Option C and D are not necessary as buying both currencies would not necessarily achieve the desired outcome. Option E is also incorrect as devaluing the currency would lead to a lower exchange rate.

To Fix the Exchange Rate (Foreign Currency Price of Domestic