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What must a central bank do to maintain the fixed exchange rate when its country's inflation...

What must a central bank do to maintain the fixed exchange rate when its country's inflation rate is higher than its trading partners?

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Answer #1

A fixed exchange rate occurs when a currency is kept at a certain level compared to other currencies. If inflation rate is high the currency will begin to fall below depreciate so the central bank should.

A central bank maintains a fixed exchange rate by buying or selling its currency. If the domestic currency depreciates then the central bank will intervene and and buy its reserves of domestic currency in order to increase the value of the domestic currency by increasing its demand in the forex market.

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