Answer to Question #74465 in Economics for nazira

Question

A fixed exchange rate country experiences upward pressure on the exchange rate value of its currency. The central bank chooses to intervene in the market to maintain its fixed exchange rate. How would the central bank go about intervening? If the pressures for the currency to appreciate persist, would it be difficult to maintain the fixed exchange rate?

Answer 1

In order to maintain fixed exchange rate, central bank has to sell some amount of foreign currency from its savings (to create a demand for national currency). The ability of central bank to withstand the pressures for the currency to appreciate depends on its reserves of gold / foreign currency.