If a country finds its fixed rate currency falling:

Question

Quizplus · Accepted Answer

When a country's fixed rate currency is falling, the best choice is to use foreign exchange reserves to purchase some of its currency. This will increase demand and reduce the supply of the currency, increasing its value and helping to maintain the fixed exchange rate. Selling currency from foreign exchange reserves (Choice B) would have the opposite effect and lead to further devaluation of the currency. While it is true that monetary policy cannot be used to maintain the exchange rate (Choice C), this is not a viable solution as it would require abandoning the fixed exchange rate. Allowing the currency to devaluate (Choice D) would also require abandoning the fixed exchange rate and could lead to economic instability.

If a Country Finds Its Fixed Rate Currency Falling