If a country has a fixed exchange rate
A)the equilibrium exchange rate in that market does not respond to changes in supply and demand for currency.
B)central banks have more control over real GDP in the economy.
C)central banks must buy and sell their holdings of currencies to maintain a given exchange rate.
D)the exchange rate is allowed to fluctuate in response to changes in the supply and demand for currency.

Question

Quizplus · Accepted Answer

With a fixed exchange rate, central banks must intervene in the foreign exchange market by buying and selling their holdings of currencies to maintain the fixed exchange rate. This is necessary to prevent fluctuations in the exchange rate in response to changes in supply and demand for the currency. Therefore, choice C is the correct answer. Choices A and D are incorrect as a fixed exchange rate does not allow the exchange rate to respond to changes in supply and demand for currency. Choice B is unrelated to the concept of a fixed exchange rate.

If a Country Has a Fixed Exchange Rate