A country that attempts to keep its exchange rate fixed will have devaluation of its currency (or exchange rate) if the persistent balance of payments ________ cause it to ________ foreign exchange reserves.
1)
deficits, amass dangerous amounts of
2)
surpluses, amass dangerous amounts of
3)
surpluses, run dangerously short of
4)
deficits, run dangerously short of
Please explain why.
A country that attempts to keep its exchange rate fixed will have devaluation of its currency (or exchange rate) if the persistent balance of payments ________ cause it to ________ foreign exchange reserves.
| 1) | deficits, amass dangerous amounts of |
| 2) | surpluses, amass dangerous amounts of |
| 3) | surpluses, run dangerously short of |
| 4) | deficits, run dangerously short of |
Please explain why.
Related textbook solutions
Related questions
Which of the following most accurately describe the operation of the Bretton Woods system of adjustable pegged exchange rates? Check all that apply.
Countries can always reach their domestic stabilization objectives by devaluing their currencies.
A semi-fixed exchange rate system ties currencies to each other to provide stable exchange rates for commercial and financial transactions.
Countries can devalue or revalue its currency so as to restore payments balance.
Adjustable pegged rates enable estimates of the equilibrium rate to which a currency should be re-pegged.
Why do nations use a crawling peg exchange rate system?
To make small but frequent exchange rate adjustments promoting payments balance
To enable short-term volatility and longer-term swings in exchange rates that overshoot values justified by fundamental conditions
To make significant exchange rate adjustments promoting payments balance
To implement par value changes in a small number of large steps
Use the following categorization table to indicate the case for and the case against a system of floating exchange rates.
|
For or |
Against |
||
|---|---|---|---|
| It enables continuous adjustments of payments balances. | |||
| It reduces the need for international reserves. | |||
| It leads to disorderly exchange markets. | |||
| It may be inflationary. |
