With Fixed Exchange Rates, Assume That the Home Currency Becomes

question 14

Multiple Choice

With fixed exchange rates, assume that the home currency becomes undervalued 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:

Salvage Value

The calculated resale worth of an asset at the close of its efficient lifespan.

Depreciation

The allocation process of a tangible asset's cost over the period it is useful.

Double-Declining-Balance

A method of accelerated depreciation which doubles the normal depreciation rate, reducing the value of an asset more quickly in its early years.

Salvage Value

The predicted residual value of an asset upon reaching the end of its practical lifespan.