When Market Forces Start to Change a Fixed Exchange Rate

question 24

Multiple Choice

When market forces start to change a fixed exchange rate, the government:

• A) must buy or sell currency to bring the market back to the fixed rate.
• B) holds the exchange rate constant at the new equilibrium.
• C) only intervenes if the change in the exchange rate would harm export-focused domestic industries.
• D) None of these are true.

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Definitions:

Entropy

A measure of disorder or randomness in a system, often associated with the second law of thermodynamics in physics.

Open Systems

A system is open or closed to the degree that it can exchange information and energy with its environment. A more open system can adapt to environmental changes.

Closed Systems

A system is open or closed to the degree that it can exchange information and energy with its environment. A closed system cannot adapt to environmental changes and is more likely to move toward entropy.

Levels

Different stages or degrees in a hierarchy or process.