A country under a fixed exchange rate system and running a large trade __________ tends to attract speculative attacks against its currency,because the currency traders deem the currency to be ___________.

Question

Quizplus · Accepted Answer

A country running a large trade deficit is likely to deplete its foreign exchange reserves in order to maintain the fixed exchange rate, leading currency traders to deem the currency to be overvalued. This perception of overvaluation makes the currency vulnerable to speculative attacks, which can further deplete the country's reserves and potentially lead to a currency crisis.

A Country Under a Fixed Exchange Rate System and Running