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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
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B. supply foreign exchange to the market.
C. supply domestic currency 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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