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Part $1$

In a fixed exchange rate$$ regime, when the domestic currency becomes

undervaluedundervalued$,$

in order to keep the exchange rate at par the central bank must

A$.$

sell domestic$$ currency, which leads to a loss of international reserves.

B$.$

buy domestic$$ currency, which leads to a gain of international reserves.

C$.$buy domestic currency comma which leads to a loss of international reserves.

buy domestic currency comma which leads to a loss of international reserves.buy$$domestic$$currency$,$which$$leads$$to$$a$$loss$$of$$international$$reserves$.$

D$.$sell domestic currency comma which leads to a gain of international reserves.

sell domestic currency comma which leads to a gain of international reserves.sell$$domestic$$currency$,$which$$leads$$to$$a$$gain$$of$$international$$reserves$.$

Part $2$

If a$$ country's central bank eventually runs out of international reserves when it attempts to keep the currency from$$ depreciating, it cannot keep its currency from$$ depreciating, and a

$$

$$

current account deficit

devaluation

revaluation

trade deficit

must$$ occur, in which the par exchange rate is reset at a lower level.