With Fixed Exchange Rates, Assume That the Home Currency Becomes

question 121

Multiple Choice

With fixed exchange rates, assume that the home currency becomes overvalued relative to its par value.Other things equal, to maintain the fixed exchange rate the home country's central bank must

• A) purchase the home currency, and as a result it loses international reserves.
• B) purchase the home currency, and as a result it gains international reserves.
• C) sell the home currency, and as a result it loses international reserves.
• D) sell the home currency, and as a result it gains international reserves.

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Definitions:

Demand

The desire and ability of consumers to purchase goods or services at given prices, playing a critical role in determining market prices and quantities.

Supply

The aggregate availability of a product or service for acquisition at a designated price.

Competition

A market situation in which multiple sellers are trying to sell their product or service to the same buyers, leading to a struggle for market share.

Industry

A group of companies that operate in a specific sector of the economy, manufacturing or supplying goods and services in a particular domain.