If a country fixes the exchange rate for its currency relative to other currencies,and if the official exchange rate is overvalued relative to its fundamental value,then

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If a country fixes its exchange rate and its official exchange rate is overvalued, then the real market value of its currency is lower than its fixed rate. This creates a situation where the demand for foreign currency exceeds the supply of the domestic currency, leading to a balance of payments deficit. To correct the imbalance, the country will likely need to devalue its official exchange rate, which means reducing the value of its currency in the fixed rate system. This makes its exports more competitive, reduces imports, and helps correct the balance of payments. A devaluation is a deliberate action by the authorities that sets a new exchange rate. It is different from a depreciation, which is a market-driven decline in the exchange rate.

If a Country Fixes the Exchange Rate for Its Currency