To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the central bank must:
A) buy foreign currency.
B) sell foreign currency from reserves.
C) raise taxes.
D) decrease government spending.

Question

Quizplus · Accepted Answer

If the exchange rate falls below the fixed level, it means the value of the domestic currency is decreasing and the foreign currency is gaining value. To maintain the fixed exchange rate, the central bank will sell foreign currency from its reserves to increase demand for the domestic currency and prop up its value. This is done to maintain the exchange rate at the fixed level. Therefore, option B, selling foreign currency from reserves, is the correct choice.

To Maintain a Fixed-Exchange-Rate System, If the Exchange Rate Moves