To maintain a fixed exchange rate via intervention in the markets, a government should:
A) be ready to crack down on illegal traders.
B) be ready to buy the home currency with foreign currency reserves when the home currency's value declines.
C) be ready to sell the home currency when the home currency's value declines.
D) be ready to borrow funds from international banks when the home currency's value declines.

Question

Quizplus · Accepted Answer

To maintain a fixed exchange rate via intervention in the markets, a government should be ready to buy the home currency with foreign currency reserves when the home currency's value declines. This is because buying its own currency in the foreign exchange market will increase the demand for the home currency and hence its value, allowing the government to maintain the fixed exchange rate. Crackdown on illegal traders (A), selling the home currency (C), or borrowing funds from international banks (D) may not necessarily help the government maintain the fixed exchange rate.

To Maintain a Fixed Exchange Rate Via Intervention in the Markets