Under a Fixed Exchange Rate System, the Government Bears the Responsibility

question 27

Multiple Choice

Under a fixed exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. If the sum of the current and capital accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is LESS THAN ZERO, a ________ demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

• A) surplus; sell
• B) surplus; buy
• C) deficit; sell
• D) deficit; buy

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Definitions:

Diabetes

A metabolic disease characterized by high blood sugar levels over a prolonged period, which can lead to serious health problems if not managed properly.

Middle Age

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Sexual-Reproductive System

The organs and structures in the body involved in reproduction and the functions related to it, including the genitals and associated glands and hormones.