Finance, Forex and Investments

When a government maintains an overvalued exchange rate, what happens to its foreign reserves?

When a country has a fixed exchange rate that is greater than the free market equilibrium rate, its exchange rate is overvalued. A. Foreign reserves decrease. B. Foreign reserves remain unchanged. C. Foreign reserves increase.

Public Comments

1. A. Foreign reserves decrease. b/c is has to sell off reserves to prop the exchange rate.