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 capital 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.'
A. deficit; buy
B. deficit; sell
C. surplus; buy
D. surplus; sell

Answer 1

Answer:

D. surplus; sell

Explanation:

According to my research on Economics, I can say that based on the information provided within the question a surplus demand currently exists and the government must intervene and sell domestic currency for foreign currencies or gold. A surplus is an excess of something, which the accounts being greater than zero indicate this. Then by selling their currency they are leveling out the BOP back to zero where it should be.

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