Assertion (A): A country with a fixed exchange rate and a large BoP deficit may have to devalue.
Reason (R): Under a fixed rate, the central bank can create unlimited foreign exchange reserves.

Both A and R are true, and R is the correct explanation of A.Correct answerYour answerBoth A and R are true, but R is not the correct explanation of A.Correct answerYour answerA is true, but R is false.Correct answerYour answerA is false, but R is true.Correct answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer C

Correct answer: C

A is true: a lasting shortage of foreign exchange drains reserves until the rate must change.
R is false: a central bank can print its own currency, not foreign currency.

Concept: Why devaluation happens
Typical timeTypical: 100 s
Your timeYours: —

The rule this testsThe fixed rate: devaluation and revaluation

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Ten questions from Foreign Exchange Rate, at your own pace.

Assertion (A): A country with a fixed exchange rate and a large BoP deficit may have to devalue.Reason (R): Under a fixed rate, the central bank can create unlimited foreign exchange reserves.

Explanation

Assertion (A): A country with a fixed exchange rate and a large BoP deficit may have to devalue.
Reason (R): Under a fixed rate, the central bank can create unlimited foreign exchange reserves.