A country's central bank is committed to maintaining a fixed exchange rate peg against the US dollar (USDUSDUSD). Due to a sudden surge in capital flight, there is significant downward pressure on the domestic currency.
Which of the following policy actions should the central bank implement to prevent the domestic currency from depreciating below its peg?
Selling domestic currency in the foreign exchange market to buy foreign assets
Lowering the base interest rate to stimulate domestic investment
Lowering reserve requirements for commercial banks to increase liquidity
Selling foreign currency reserves to purchase the domestic currency
30 exam-style questions on OCR A Level Economics Exchange rates. Each one has a worked solution and a mark scheme showing where the marks go.