Hong Kong is maintaining a fixed exchange rate with USD. Suppose that at the start of 2022, the fundamental value of the exchange rate was equal to the fixed exchange rate. During 2022, the US had 6% inflation while Hong Kong only had 2.4% inflation.

In order for the central bank to maintain the peg, what will happen to its foreign reserves?

Decrease only if the current account is positive

Decrease

Increase

No change

Answer rating: 100% (QA)

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