Question

easynotrcards Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing ________ assets. Question 2 options: A) foreign; foreign B) domestic; domestic C) domestic; foreign D) foreign; domestic

Answer 1

Answer:

D) foreign; domestic

Explanation:

The central Bank can improve the domestic currency by using the reserves. If the domestic currency undervalued the central bank may intervene to sell the Foreign currency and purchase the domestic currency, which will increase the demand of domestic currency and increase the supply of foreign currency in the market which will improve the value of domestic currency and undervalue the foreign currency.

Answer 2

Answer:

D) foreign; domestic

Explanation:

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency.

To increase the value of their currency, countries could try several policies.

• Sell foreign exchange assets, purchase own currency
• Raise interest rates (attract hot money flows
• Reduce inflation (make exports more competitive
• Supply-side policies to increase long-term competitiveness.