Question

In a fixed exchange rate system, a government intervenes to maintain the value of her currency at a fixed (target) value. Suppose that the equilibrium price (from the foreign exchange market) for the country’s currency is below the target rate that the government is trying to achieve. How should the government intervene in the currency market?

Answer 1

In a fixed exchange rate system ,the central bank of the country stabilises the currency rate against the value if another country' s currency.It is done by using the open market mechanism by rhe Monetary authority.

If the Equilibrium exchange rate of foreign exchange ( the rate at which demand and supply of foreign exchange is equal) is below the target rate ( fixed exchange rate) of foreign exchange , the central bank will take actions to create artificial demand for foreign exchange.

It is done by open market purchase if foreign currency in order to appreciate it.

I will increase rhe demanc for foreign currency, the demand curve will shift rightward and new equlibrium price will be equal to the target exchange rate