To finance a balance of payments deficit, with a fixed exchange rate and no private capital flows, the central bank _____ foreign exchange and ____ domestic currency.
A) buys, sells
B) buys, buys
C) sells, sells
D) sells, buys

Question

Quizplus · Accepted Answer

To finance a balance of payments deficit under a fixed exchange rate system and in the absence of private capital flows, the central bank sells foreign exchange reserves to pay for the deficit and buys domestic currency to support its value.

To Finance a Balance of Payments Deficit, with a Fixed