ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A decreasing government borrowing
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B decreasing government spending
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C decreasing the interest rate
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D decreasing the money supply
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Detailed explanation-1: -A fixed exchange rate is a regime applied by a government or central bank that ties the country’s official currency exchange rate to another country’s currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency’s value within a narrow band.
Detailed explanation-2: -When the central bank sells domestic currency and buys foreign currency in the Forex, the transaction indicates a balance of payments surplus. A balance of payments deficit (surplus) arises whenever there is excess demand for (supply of) foreign currency on the private Forex at the official fixed exchange rate.
Detailed explanation-3: -A floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies.
Detailed explanation-4: -A fixed or pegged rate is determined by the government through its central bank. The rate is set against another major world currency (such as the U.S. dollar, euro, or yen). To maintain its exchange rate, the government will buy and sell its own currency against the currency to which it is pegged.