Question

Under a fixed exchange-rate system, what automatic adjustments promote payments equilibrium?

Under a fixed exchange-rate system, what automatic adjustments promote payments equilibrium?

Homework Answers

Answer #1

Though the exchange rate is fixed by the government, there are adjustments being brought about by the markets which are free to operate, including the market for money. The money market has demand for and supply of money which influences the rate of interest. Similarly prices are influenced under goods market where variations in prices and thus, interest rates help in automatic adjustments for payments equilibrium. If there are disequilibria in the payment the same are resolved by exchange of international reserve assets.

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