A fixed exchange rate above the market value will lead to an outflow of foreign currencies.

Question

Quizplus · Accepted Answer

When a fixed exchange rate is set above the market value, it means that the domestic currency is overvalued relative to foreign currencies. This makes domestic exports more expensive and less competitive in international markets, while imports become cheaper, leading to an increase in demand for foreign currencies. To maintain the fixed exchange rate, the central bank must sell domestic currency and buy foreign currency, which depletes foreign exchange reserves and leads to an outflow of foreign currencies.

A Fixed Exchange Rate Above the Market Value Will Lead