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

question 61

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 GREATER 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:

Late Seventeenth Century

The closing decades of the 17th century, often referring to the period from 1660 to 1700, which was characterized by both turmoil and progress in various world regions.

Poverty

A state where an individual or community lacks the financial resources and essentials for a minimum standard of living.

Economic And Social Conditions

The circumstances affecting the economic activities, welfare, and quality of life of individuals within a society.

Eighteenth Century

The period from January 1, 1701, to December 31, 1800, in the Gregorian calendar, notable for Enlightenment and the early stages of the industrial revolution.