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:

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