A Fixed Exchange Rate Policy Does Not Create an Exception

question 25

Essay

A fixed exchange rate policy does not create an exception to the laws of supply and demand for a country. How do governments maintain balance in foreign exchange markets when they use a fixed exchange rate policy?

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Definitions:

Regressive

Pertains to a situation or policy that has a disproportionately greater impact on those with lower income or status.

Excise Tax

A tax imposed on the sale or manufacture of specific goods, such as alcohol and tobacco, within a country.

Elasticity

A measure of how much the quantity demanded or supplied of a good or service changes in response to a change in price.

Inelastic Supply

Describes a situation where the quantity supplied of a good changes by a smaller percentage than the percentage change in its price.