If the central bank pegs the exchange rate below its free-market equilibrium level,there will be an ________ of/for foreign exchange,and the central bank will ________ foreign currency.

Question

Quizplus · Accepted Answer

If the central bank pegs the exchange rate below its free-market equilibrium level, it creates an excess demand for foreign exchange since the demand for foreign exchange increases due to the artificially low exchange rate. Therefore, the central bank will need to sell its own currency to purchase the foreign currency to maintain the pegged rate. Hence, the correct option is D, excess demand, and sell.

If the Central Bank Pegs the Exchange Rate Below Its