Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?
A) The government has a budget surplus.
B) The government has a budget deficit.
C) The central bank's foreign-currency reserves are increasing.
D) The central bank's foreign-currency reserves are decreasing.

Question

Quizplus · Accepted Answer

If the central bank's foreign-currency reserves are increasing, it means that the central bank is buying foreign currency to maintain the fixed exchange rate. This results in a higher demand for foreign currency and a lower supply of the country's currency, causing the currency to be undervalued. A budget surplus or deficit is not necessarily indicative of the currency's value.

Which of the Following Would Be Evidence That a Country