In an economy with a fixed exchange rate, an increased demand for foreign goods would increase the supply of local currency, and the government would have to buy:
A) foreign currency in the foreign exchange market to prevent the domestic currency from depreciating.
B) local currency in the foreign-exchange market to prevent the currency from depreciating.
C) local currency in the foreign-exchange market to prevent the currency from appreciating.
D) foreign currency in the foreign exchange market to prevent the domestic currency from appreciating.

Question

Quizplus · Accepted Answer

In a fixed exchange rate system, if there is increased demand for foreign goods, the local currency supply increases as people exchange it for foreign currency. To maintain the fixed rate and prevent depreciation, the government buys local currency.

In an Economy with a Fixed Exchange Rate, an Increased