Suppose a currency would trade at 3 units of the foreign currency for 1 unit of the domestic currency if it was traded in a flexible exchange rate system. The central bank decides to fix the exchange rate at 2 units of the foreign currency for 1 unit of the domestic currency. Why would a central bank do this and who benefits from it? What are the risks of doing this?

Answer rating: 100% (QA)

A central bank may choose to fix the exchange rate at a specific level as described in your scenario for several reasons Stability One primary objecti... View the full answer