If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in charge of currency A is:
A) running out of currency A.
B) running out of currency B.
C) generating excessive revenue from seigniorage.
D) ineffective fiscal policy.

Question

Quizplus · Accepted Answer

When a central bank fixes its currency (A) to another currency (B), it must maintain reserves of currency B to manage its exchange rate. If there's high demand for currency B or if the central bank needs to support the fixed exchange rate by selling B and buying A, it risks depleting its reserves of currency B.

If the Exchange Rate of Currency a Is Fixed to a Unit