To Maintain a Fixed-Exchange-Rate System, If the Exchange Rate (Foreign

question 54

Multiple Choice

To maintain a fixed-exchange-rate system, if the exchange rate (foreign currency/local currency) moves below the fixed-exchange-rate level, then the central bank must:

• A)buy foreign currency.
• B)sell foreign currency from reserves.
• C)raise taxes.
• D)decrease government spending.

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Definitions:

Default

Failure to fulfill a financial obligation, especially failing to make payments on a loan, bond, or other debt instrument.

Nonfinancial Businesses

Companies primarily engaged in activities other than financial services, such as manufacturing, services, or retail.

Marketable Securities

Financial instruments that can be easily converted into cash, such as stocks, bonds, and Treasury bills.

Liabilities

Financial obligations or debts owed by a company or an individual to others, which must be settled over time by transferring economic benefits.