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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