Under a Fixed Exchange Rate System, the Government Bears the Responsibility

question 61

Multiple Choice

Under a fixed exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. If the sum of the current and capital accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is GREATER THAN ZERO, a ________ demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

• A) surplus; sell
• B) surplus; buy
• C) deficit; sell
• D) deficit; buy

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Definitions:

Consolidation

The process of combining multiple debts, loans, or businesses into a single new loan or corporate entity.

Legal Existence

A term indicating that an entity is recognized under the law as having legal rights and obligations.

Hostile Tender Offer

An attempt to acquire a company against the wishes of its management and board by directly offering to buy the shares from the shareholders.

Cash

Cash is a medium of exchange in the form of physical currency, such as coins and banknotes.