Show How a Central Bank Fixes the Exchange Rate in the Face

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The Answer is In today's environment of mobile capital, capital flows can be a blessing for a country with a fixed exchange rate. An increase in domestic interest rates will cause an inflow of capital and create an additional supply of foreign currency. With a fixed exchange rate the central bank could intervene in the foreign exchange market and buy foreign currency with domestic currency. While capital inflows can make it easier to maintain a pegged exchange rate, capital outflows can lead to a currency crisis. As a result of the effects of capital flows in a fixed exchange rate system, many countries have adopted restrictions or limits on inflows and outflows of portfolio capital.

Show How a Central Bank Fixes the Exchange Rate in the Face

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Show How a Central Bank Fixes the Exchange Rate in the Face

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Correct Answer:VerifiedShow Answer

Correct Answer:
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