With a fixed exchange rate, when the quantity supplied exceeds the quantity demanded, the central bank must intervene in the foreign exchange market and
A) buy reserve currencies and the domestic currency.
B) sell reserve currencies and the domestic currency.
C) support stock market prices.
D) sell reserve currencies and buy the domestic currency.
E) sell bank stocks to support consumer confidence.

Question

Quizplus · Accepted Answer

When the quantity supplied exceeds the quantity demanded in a fixed exchange rate regime, there will be an excess supply of the domestic currency, leading to a depreciation of the domestic currency's value. To maintain the fixed exchange rate, the central bank needs to intervene by selling its reserve currencies to buy back the excess domestic currency, hence supporting its value. Therefore, the correct answer is D, which states that the central bank must sell reserve currencies and buy the domestic currency.

With a Fixed Exchange Rate, When the Quantity Supplied Exceeds