Under a Fixed Exchange-Rate System, Which of the Following Statements

question 223

Multiple Choice

Under a fixed exchange-rate system, which of the following statements is true?

• A) An overvalued currency at the pegged rate will tend to be inflationary.
• B) A peg that overvalues the local currency is harder to maintain than one that undervalues it.
• C) A fixed rate that undervalues the local currency (relative to equilibrium) will drain the nation's FX reserves.
• D) A nation's central bank has exactly the same capacity to increase the value of its currency as it does to decrease it.

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Definitions:

Straight-line Method

A method of calculating depreciation of an asset by evenly spreading its cost over the expected useful life.

Semiannual Interest

Interest payments made twice a year on loans, bonds, or deposits.

Bond Liability

A financial obligation representing money a company owes to bondholders, to be repaid at a future date, typically with interest.

Market Rate

The current interest rate available in the marketplace on loans, bonds, or deposits, often influenced by supply and demand and the monetary policy of central banks.