To counteract the depreciation of national currency against the U.S.dollar, the central bank of a country can intervene in the foreign exchange market.Which of the following imposes a restriction on this ability of the central banks to maintain the fixed exchange rate?
A)The central banks have a limited amount of international reserve.
B)The central banks have a limited amount of domestic currency.
C)Unrestricted sale of foreign currency will cause inflation in the domestic economy.
D)The supply of dollars is perfectly elastic in the foreign exchange market.
E)The central banks need to maintain a certain amount of its assets in the form of gold.

Question

Quizplus · Accepted Answer

The central bank's ability to intervene in the foreign exchange market and maintain a fixed exchange rate depends on the amount of international reserve it holds. If the central bank has a limited amount of international reserve, it may not be able to sustain the intervention for long periods, leading to fluctuations in the exchange rate. Therefore, the limited amount of international reserve imposes a restriction on the ability of central banks to maintain a fixed exchange rate.

To Counteract the Depreciation of National Currency Against the U