Question

a) Speculators are likely to attack the foreign exchange market if country maintains  

(select one)  fixed exchange rate and domestic currency is overvalued , fixed exchange rate and domestic currency is undervalued , floating exchange rate regime  .

b) The speculator attack will shift the  

(select one)  supply for domestic currency to the right and government will have to buy domestic currency ,

supply for domestic currency to the right and government will have to sell domestic currency ,

supply for domestic currency to the left and government will have to buy domestic currency ,

supply for domestic currency to the left and government will have to sell domestic currency ,

demand for domestic currency to the right and government will have to buy domestic currency ,

demand for domestic currency to the right and government will have to sell domestic currency ,

demand for domestic currency to the left and government will have to buy domestic currency ,

demand for domestic currency to the left and government will have to sell domestic currency .

Answer 1

Speculative attacks mean massive and sudden selling of a country's currency which can be done either or both of the domestic and foreign investors in case of fixed exchange rate regime. The idea behind this is that when a huge amount of currency would be sold to the government, the government would go out of the reserves which it keeps to purchase its own currency at the fixed price (due to fixed exchange rate). Now if the government would go out of reserves then it would allow it to float. This often leads to the depreciation of the currency.

a. fixed exchange rate

b. supply the domestic currency to the right and the government must purchase it.