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:

Chesapeake Colonies

Refers to the English colonies in North America that were located around the Chesapeake Bay, notably Virginia and Maryland, in the 17th century.

New England

A region in the northeastern United States comprising six states: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, historically significant for its early settlement by Pilgrims.

Federal Liberty

A concept related to the freedoms and rights guaranteed to individuals by a federal government, often found in the context of constitutional discussions.

Civil Liberty

The freedom of citizens to exercise traditional rights such as freedom of speech, assembly, and religion without governmental interference or repression.