Which fixed exchange rates and no private capital flows, to correct a balance of payments deficit, the central bank will _______ and ________ ?
Correct answer: B. sell foreign exchange buy domestic currency
- A. buy foreign exchange, sell domestic currency
- B. sell foreign exchange buy domestic currency
- C. buy foreign exchange buy domestic currency
- D. sell foreign exchange sell domestic currency
Explanation
A balance-of-payments deficit creates excess demand for foreign currency, so the central bank supports the fixed rate by selling foreign exchange. It receives domestic currency in return, thereby buying domestic currency.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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