Question

Under a system of fixed exchange​ rates, what happens if a​ country's currency is​ overvalued?

A. Increased demand for exports.
B. Trade surplus.
C. Currency depreciation.
D. Trade deficit.

Answer 1

When a country's currency is overvalued under a fixed exchange rate system, it often results in a trade deficit, as exports decrease and imports increase due to higher relative prices.

Step-by-step explanation:

Under a system of fixed exchange rates, if a country's currency is overvalued, it means that the currency is priced too high relative to other currencies. This overvaluation typically leads to a decrease in demand for the country's exports because its goods and services become more expensive for foreign buyers. As a result, the country is likely to experience a trade deficit, where the value of its imports exceeds the value of its exports.