What must a nation's central bank do to maintain a fixed exchange rate?
A) achieve a balanced budget
B) keep the level of foreign reserves above zero so that it can prevent a fall in value of its currency
C) keep the level of foreign reserves at zero
D) hold only foreign government bonds to back the currency 100%

Question

Quizplus · Accepted Answer

To maintain a fixed exchange rate, a nation's central bank must keep the level of foreign reserves above zero so that it can intervene in the foreign exchange market to prevent a fall in the value of its currency. This may involve buying its own currency on the market, or raising interest rates to make its currency more attractive to foreign investors. Achieving a balanced budget, holding only foreign government bonds, or keeping the level of foreign reserves at zero are not necessarily sufficient to maintain a fixed exchange rate.

What Must a Nation's Central Bank Do to Maintain a Fixed