Which of the following is the result of an overvalued fixed exchange rate?

Question

Quizplus · Accepted Answer

When a fixed exchange rate is overvalued, the domestic currency is artificially strong and therefore more expensive relative to other currencies. This makes exports more expensive and imports cheaper, leading to an increase in imports and a decrease in exports. This can result in a depletion of official international reserves as the central bank must sell foreign currency to maintain the fixed exchange rate. Inflation and an increase in aggregate demand can occur due to increased imports and a stronger currency making imports cheaper. However, these effects are not necessarily a direct result of an overvalued fixed exchange rate.

Which of the Following Is the Result of an Overvalued