Question

This is currency that is kept at a high artificial exchange rate, overvalued, and controlled by the national central bank.

Answer 1

Currency kept at an artificially high exchange rate is controlled by the central bank and is part of the monetary base, which includes currency in circulation and bank reserves. Central banks may intervene in the exchange rate market, purchasing foreign currencies to maintain their currency's value, though this has an opportunity cost. Various strategies can be employed by governments to manipulate their currency's value, with potential consequences like inflation.

Step-by-step explanation:

The currency mentioned is one that is kept at a high artificial exchange rate and is overvalued. This type of currency is controlled by the national central bank. Such currencies are often part of the monetary base which includes both the currency in circulation and bank reserves held in vaults. However, only the portion that is in circulation is counted in the money supply.

Central banks may intervene in the exchange rate market to maintain the value of their currency. They may create and sell their own currency in order to purchase foreign currencies such as U.S. dollars or euros, which are then held as reserves. While these reserves are necessary to maintain the pegged or controlled exchange rate, they come with an opportunity cost and central banks may be reluctant to increase such reserves indefinitely.

When a government seeks to manipulate the value of its currency, it can pursue various strategies such as changing interest rates, altering trade incentives, and directly intervening in exchange rate markets. Such interventions may serve short-term economic objectives, but they also risk causing imbalances like those experienced in countries with hyperinflation due to excessive money printing to finance budget deficits.

Answer 2

The question discusses an overvalued currency maintained by a central bank's intervention in the foreign exchange market, which involves holding large reserves of foreign currencies and selling the domestic currency to maintain a higher exchange rate than the market would naturally set.

Step-by-step explanation:

The subject matter addressed in the question deals with a situation where a country's central bank keeps its currency at an artificially high exchange rate. This is typically referred to as an overvalued currency that is controlled by the national central bank's intervention in the foreign exchange market. To maintain this overvalued state, the central bank may engage in perpetual buying of stronger foreign currencies, like U.S. dollars or euros, to hold as reserves, selling its own currency in the process. However, this strategy comes with an opportunity cost and can lead to significant financial complications, such as enormous reserves of foreign currency that the central bank might not want to hold indefinitely. It's important to understand that only part of this monetary base, specifically the currency in circulation, is typically counted towards the country's money supply, as opposed to the entire sum, which also includes bank reserves.

One of the tools a government can use to manipulate the currency value is monetary policy, through actions such as adjusting interest rates or directly influencing the amount of money in circulation. In the context of an overvalued currency, keeping a high exchange rate might be part of a broader strategy to control inflation, influence trade balances, or stabilize the economy. However, interventions to maintain an overvalued currency can lead to economic distortions and are typically not sustainable in the long term without significant external reserves or a sound macroeconomic policy foundation.