A country that uses a fixed exchange rate to undervalue its currency will:
A) increase its exports.
B) encourage capital flow to foreign countries.
C) increase the price of imports for domestic consumers.
D) All of these are true.

Question

Quizplus · Accepted Answer

A fixed exchange rate used to undervalue a currency makes exports cheaper and more competitive internationally, thus increasing exports. It also makes imports more expensive for domestic consumers, thereby increasing the price of imports. Additionally, by making domestic assets and investments relatively cheaper for foreigners, it can encourage capital flow to foreign countries.

A Country That Uses a Fixed Exchange Rate to Undervalue