Suppose that Ruritania has a fixed exchange rate versus the U.S. dollar
If foreign investors become convinced that the Ruritanian currency is overvalued, what actions might they take to profit from this conviction? Would these actions make it easier or harder for Ruritania to maintain the value of its currency versus the dollar? Why?
Foreign investors will want to sell Ruritanian currency denominated assets and buy dollar denominated assets. These actions will drain Ruritania's dollar reserves and make it harder for Ruritania to maintain the value of its currency versus the dollar.
You might also like to view...
Which of the following is an argument in favor of interventionist trade policies?
(a) Cheaper capital goods. (b) Declining terms of trade. (c) Decreased losses from rent-seeking activities. (d) All of the above. (e) None of the above.
China has a trade deficit in services, while India has a trade surplus in services
Indicate whether the statement is true or false