Answer to Question #276739 in Macroeconomics for Anna

Question

The nominal exchange rate of the kwacha (currency of Zambia) is equal to $1.28 (U.S. dollars) per kwacha. However, the kwacha is set a fixed rate equal to $1.25 per kwacha. This means the kwacha exchange rate is ____________. In order to maintain this exchange rate the Zambian government will see _____________ in their stock of international reserves.

A. undervalued; a net decline 

B. undervalued; a net increase 

C. overvalued; a net increase

D. overvalued; a net decline 

Answer 1

The answer is D.

Overvalued; net decline