In an Economy with a Fixed Exchange Rate, an Increased

question 12

Multiple Choice

In an economy with a fixed exchange rate, an increased demand for foreign goods would increase the supply of local currency, and the government would have to buy:

• A) foreign currency in the foreign exchange market to prevent the domestic currency from depreciating.
• B) local currency in the foreign-exchange market to prevent the currency from depreciating.
• C) local currency in the foreign-exchange market to prevent the currency from appreciating.
• D) foreign currency in the foreign exchange market to prevent the domestic currency from appreciating.

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Definitions:

Differentiated Product

A product that differs from its competitors based on features, quality, branding, or some other characteristics.

Perfectly Competitive

A market structure where many firms offer identical products, entry and exit are easy, and no individual buyer or seller has any influence over prices.

Monopoly

A market structure characterized by a single seller or company dominating the entire market, leading to limited competition.

Monopolistically Competitive

A market structure where many firms sell products that are similar but not identical, allowing for some degree of market power.