Suppose that Econland has a fixed exchange-rate system. Econland’s government (its central bank) will exchange as much local currency (say pesos) for foreign currency (say dollars) and as much foreign currency (say dollars) for local currency (say pesos) as is necessary to maintain the peg. Which of the following statements is not true?

Question

Suppose that Econland has a fixed exchange-rate system. Econland’s government (its central bank) will exchange as much local currency (say pesos) for foreign currency (say dollars) and as much foreign currency (say dollars) for local currency (say pesos) as is necessary to maintain the peg. Which     of the following statements is not true?

Quizplus · Accepted Answer

The statement "Being the central bank, it has an equal capacity to satisfy requests to exchange dollars for pesos, and pesos for dollars" is not true. In a fixed exchange-rate system, the central bank's primary goal is to maintain the currency peg, which means it may prioritize exchanging foreign currency for local currency to prevent the value of the local currency from decreasing. Thus, the central bank may have limited capacity to fulfill requests for foreign currency.

Suppose That Econland Has a Fixed Exchange-Rate System