Question

Under a fixed exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. If the sum of the current and financial accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is GREATER THAN ZERO, a ________ demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

Answer 1

Answer:

D. surplus; sell

Explanation:

In the case of fixed exchanged rate, the government bears the responsibility with respect to the zero of the balance of payments

Now if the sum of the current and the financial accounts is more than the zero so it would be surplus and sell in the domestic country

Therefore in the given case, the option D is correct and the same is to be considered