Multiple Choice QuestionHow does a government using a fixed exchange rate meet the demand for its own currency?Multiple choice question.By converting more of itBy buying more of itBy selling more of itBy printing more of it
Question
Multiple Choice QuestionHow does a government using a fixed exchange rate meet the demand for its own currency?Multiple choice question.By converting more of itBy buying more of itBy selling more of itBy printing more of it
Solution
The correct answer is "By buying more of it".
Here's a step-by-step explanation:
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A fixed exchange rate, also known as a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed or pegged by the government to another single currency, a basket of other currencies, or to gold.
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When the demand for a country's currency is high, this means that more people or institutions want to buy the currency than sell it.
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To meet this demand and maintain the fixed exchange rate, the government, usually through its central bank, will buy more of its own currency in the foreign exchange market.
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This increases the supply of the currency in the market, helping to meet the demand and maintain the fixed exchange rate.
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Therefore, the correct answer is "By buying more of it".
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