The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Under a fixed exchange-rate system, in order to maintain the exchange rate:
A)governments must adopt a laissez-faire economic policy.
B)all trading partners must enjoy the same level of economic growth.
C)currencies must be inconvertible.
D)the imports of one country must equal the exports of its trading partner.
E)governments must intervene in the foreign exchange market.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Under a fixed exchange-rate system, in order to maintain the exchange rate:
A)governments must adopt a laissez-faire economic policy. 
B)all trading partners must enjoy the same level of economic growth. 
C)currencies must be inconvertible. 
D)the imports of one country must equal the exports of its trading partner. 
E)governments must intervene in the foreign exchange market.

Quizplus · Accepted Answer

Under a fixed exchange-rate system, governments must intervene in the foreign exchange market to maintain the exchange rate. This means that the government will buy or sell its own currency in the foreign exchange market to maintain the exchange rate at the fixed level. This intervention can involve buying foreign currency to increase the supply of the domestic currency in the market, which will increase the exchange rate, or selling the domestic currency to decrease its supply in the market and decrease the exchange rate. Without government intervention, the exchange rate may fluctuate and potentially deviate from the fixed rate.

The Figure Given Below Depicts the Foreign Exchange Market for British