Under a fixed exchange rate system, an excess supply for the Australian dollar in the FOREX market often resulted in:
A) an increase in liquidity in the financial system and a fall in interest rates.
B) a decrease in liquidity in the financial system and an increase in interest rates.
C) a decrease in liquidity in the financial system and a decrease in interest rates.
D) an increase in liquidity in the financial system and an increase in interest rates.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, excess supply for a currency leads to a decrease in its value. To maintain the fixed rate, the central bank needs to increase its demand for the currency. This is done by increasing interest rates, which leads to a decrease in liquidity in the financial system. Therefore, an excess supply for the Australian dollar would result in a decrease in liquidity in the financial system and an increase in interest rates.

Under a Fixed Exchange Rate System, an Excess Supply for the Australian