In fixed exchange rate systems,the tendency is for the domestic currency to be ________.

Question

Quizplus · Accepted Answer

In fixed exchange rate systems, the government or central bank sets a specific exchange rate for the currency, which means that the currency is pegged to another currency or a basket of currencies. If the exchange rate is set too high (overvalued), it can create a situation where the domestic currency is more expensive than its actual value, which can lead to an adverse effect on exports and economic growth. On the other hand, if the exchange rate is set too low (undervalued), it can create a situation where the domestic currency is less expensive than its actual value, which can lead to a loss of foreign exchange reserves and rising inflation. Therefore, in fixed exchange rate systems, the tendency is for the domestic currency to be overvalued.

In Fixed Exchange Rate Systems,the Tendency Is for the Domestic