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

question 27

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 LESS 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:

Repressor

A protein that binds to specific DNA sequences to prevent the transcription of genetic information from DNA to messenger RNA.

Metastasis

Spread of cancer from the place of origin throughout the body; caused by the ability of cancer cells to migrate and invade tissues.

Malignant Tumors

Cancerous growths characterized by uncontrolled cell division with the ability to invade surrounding tissues and spread to other parts of the body.

Benign Tumors

Non-cancerous growths in the body that do not spread to other parts and usually have a slow growth rate.