In an economy with a fixed exchange rate, when the market forces try to change the exchange rate, the government:
A) must buy or sell its currency using its own reserve to bring equilibrium in the market to where it has "fixed" it.
B) declares it can't change, and holds it constant.
C) often has to deal with an unhappy domestic population who are constantly dealing with shortages or surpluses of their currency.
D) None of these statements is true.

Question

Quizplus · Accepted Answer

In a fixed exchange rate system, the government will intervene in the foreign exchange market to maintain the fixed rate. If market forces attempt to change the exchange rate, the government must buy or sell its currency using its own reserves to bring equilibrium in the market to where it has "fixed" it. This is known as currency intervention.

In an Economy with a Fixed Exchange Rate, When the Market