Under a fixed exchange rate regime, the central bank must act to keep:
A) E = 1.
B) i+E = P.
C) P = P*.
D) i = i*.
E) NX = 0.

Question

Quizplus · Accepted Answer

Under a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to keep the domestic interest rate (i) aligned with the foreign interest rate (i*). This is necessary to prevent capital flows that could disrupt the fixed exchange rate.

Under a Fixed Exchange Rate Regime, the Central Bank Must