Under a Fixed Exchange-Rate System, If the Equilibrium Exchange Rate

question 51

Multiple Choice

Under a fixed exchange-rate system, if the equilibrium exchange rate is continually and substantially below the fixed rate, that means that the local currency is overvalued relative to equilibrium. In this case, the central bank's FX reserves will rise, and in response it has the following options, except

• A) reset the peg lower.
• B) abandon the peg altogether.
• C) counterbalance the inflationary effects with sterilization operations.
• D) allow and wait for the value of the local currency to rise.

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