Under a system of fixed exchange rates,a balance-of-payments deficit or surplus is measured by
A) determining if the total amount of foreign currency bought equals the total amount sold.
B) calculating the changes in the exchange rate.
C) the rate of increase or decrease in domestic price levels.
D) the rate of appreciation or depreciation of a currency.
E) calculating the central bank's purchases or sales of currency.

Question

Quizplus · Accepted Answer

Under a system of fixed exchange rates, a balance-of-payments deficit or surplus is measured by calculating the central bank's purchases or sales of currency. This is because in a fixed exchange rate system, the central bank typically intervenes in the foreign exchange market to maintain the exchange rate peg. If a country has a balance-of-payments deficit, which means it is buying more foreign currency than it is selling, the central bank will need to sell its own currency to prevent it from depreciating. Conversely, if a country has a surplus and is selling more foreign currency than buying, the central bank will need to buy its own currency to prevent it from appreciating. Therefore, the central bank's purchases or sales of currency are a key indicator of a country's balance-of-payments position under a system of fixed exchange rates.

Under a System of Fixed Exchange Rates,a Balance-Of-Payments Deficit or Surplus