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Suppose that Econland adopts a fixed exchange-rate system and pegs the value of its peso to the U.S. dollar. If people's demand for pesos increases in the foreign exchange markets, then Econland's foreign-exchange reserves will
A) increase.
B) decrease.
C) stay the same.
D) equal the trade balance.
Fixed Exchange-Rate System
A monetary system in which the value of a nation's currency is fixed to the value of a single currency, a group of currencies, or a tangible asset such as gold.
Foreign-Exchange Reserves
These are assets held by a central bank in foreign currencies, used to back its liabilities and influence monetary policy.
Demand for Pesos
The desire or requirement for the Mexican currency by individuals, businesses, or countries.
- Familiarize oneself with the differences linking fixed and flexible exchange rate arrangements and their respective advantages and disadvantages.
- Master the array of policy options that governments have at their disposal for stabilizing exchange rates.
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Learning Objectives
- Familiarize oneself with the differences linking fixed and flexible exchange rate arrangements and their respective advantages and disadvantages.
- Master the array of policy options that governments have at their disposal for stabilizing exchange rates.
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