Under a dirty float system,if governments believe that their currency is undervalued or falling too fast,which action might they take?

Question

Quizplus · Accepted Answer

Under a dirty float system, governments may intervene in the foreign exchange market to buy their currency when they believe it is undervalued or falling too fast. This can increase demand for the currency and ultimately lead to an appreciation in its value. Option B, reducing short-term interest rates, is a tool used by central banks under a fixed exchange rate system to encourage borrowing and stimulate the economy. Option C, selling currency in exchange markets, would have the opposite effect of what the government wants if they believe the currency is undervalued, as it would increase supply and potentially lead to a further decrease in value. Option D, raising short-term interest rates, is also a tool used under a fixed exchange rate system to combat inflation and maintain the pegged exchange rate.

Under a Dirty Float System,if Governments Believe That Their Currency