Question

Under a fixed exchange rate regime, the central bank must act to keep: 01) i = E*i*. 2) E= 1. O 3) Y=Y*. 4) P = P. 5) NX = 0. 6) none of the answers is correct

Answer 1

Under a fixed exchange rate regime, the central bank must act to keep the exchange rate fixed at a predetermined level. Therefore, the correct answer to the given question is option 2: E= 1.Fixed exchange rate regime is a monetary system where the central bank of the country sets a fixed exchange rate of its currency with respect to another country's currency. To maintain a fixed exchange rate, the central bank must intervene in the foreign exchange market by buying or selling its own currency.According to the given options, the central bank must act to keep the exchange rate fixed. Hence, options 1, 3, 4, and 5 are incorrect. The exchange rate under a fixed exchange rate regime is fixed, so the central bank will maintain the exchange rate at a predetermined level, which means the exchange rate will be equal to 1. Hence, the correct option is 2.In conclusion, the correct answer is option 2: E= 1. The central bank must act to keep the exchange rate fixed under a fixed exchange rate regime.