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If a nation with a fixed exchange rate has a balance of payment deficit, in order to maintain the exchange rate, the government must
A. supply domestic currency from the market.
B. supply foreign exchange to the market.
C. demand foreign exchange from the market.
Answer: B
Explanation:
Under a balance of payment deficit, the quantity demanded of foreign exchange exceeds the quantity supplied. This amounts to a shortage of foreign exchange. To maintain the exchange rate, the government must supply the extra foreign exchange demanded.
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