If a government wishes to limit or prohibit fluctuations in exchange rates, it will choose:
A) to fix, or peg, the value of its currency to some base currency over a sustained period.
B) to allow its currency to rise or fall in price, depending on a variety of supply and demand factors.
C) to suspend purchases and sales of its currency.
D) to allow the rate to be set by international banks.

Question

Quizplus · Accepted Answer

By fixing or pegging the value of its currency to some base currency over a sustained period, a government can limit or prohibit fluctuations in exchange rates. This means that the value of the currency will remain relatively stable and not be subject to sudden changes in its value based on supply and demand factors. This can be done by the government holding a large reserve of the base currency and buying or selling its own currency as necessary to maintain the pegged value.

If a Government Wishes to Limit or Prohibit Fluctuations in Exchange