Suppose a central bank tries to keep exchange rates fixed. When there is an increase in the demand for foreign goods, the central bank will most likely
A) buy foreign currency in exchange for the domestic currency.
B) do nothing.
C) sell the domestic currency in exchange for foreign reserves.
D) use foreign reserves to buy the domestic currency.

Question

Quizplus · Accepted Answer

To maintain a fixed exchange rate when there is increased demand for foreign goods, the central bank will use its foreign reserves to buy the domestic currency, thus supporting its value.

Suppose a Central Bank Tries to Keep Exchange Rates Fixed