(Table: Mexico's Central Bank Balance Sheet) To maintain a fixed exchange rate, which of the following will Mexico do?
A) always buy more government bonds
B) always sell more government bonds
C) buy and sell reserves
D) print more money

Question

(Table: Mexico's Central Bank Balance Sheet) To maintain a fixed exchange rate, which of the following will Mexico do? 
A) always buy more government bonds 
B) always sell more government bonds 
C) buy and sell reserves 
D) print more money

Quizplus · Accepted Answer

To maintain a fixed exchange rate, a central bank cannot simply print more money as that would lead to inflation and cause the exchange rate to fluctuate. Instead, the central bank must buy and sell reserves to maintain the fixed exchange rate. This involves using foreign currencies or gold to buy or sell its own currency in the foreign exchange market. Additionally, buying and selling government bonds can also help to adjust the money supply and maintain the fixed exchange rate, but it is not the primary tool used.

(Table: Mexico's Central Bank Balance Sheet) to Maintain a Fixed