O Levels Economics (2281)•2281/11/M/J/25
Explanation
Central Bank Sells Currency to Depreciate and Peg Exchange Rate
Steps:
- Identify equilibrium: Intersection of D and S curves determines market price above P1, creating excess demand at P1.
- Assess imbalance at P1: Demand exceeds supply by quantity XY, as quantity demanded > quantity supplied.
- Determine intervention: To peg at P1 (below equilibrium), central bank increases supply by selling yuan to satisfy excess demand.
- Calculate amount: Sell exactly XY yuan to shift effective supply rightward, clearing the market at P1.
Why B is correct:
- Selling XY yuan eliminates excess demand at P1, per central bank sterilization in forex markets to enforce pegs below equilibrium.
Why the others are wrong:
- A: Buying yuan reduces supply, raising price above P1, worsening appreciation pressure.
- C: Selling XZ yuan (larger quantity) oversupplies, driving price below P1 unintentionally.
- D: Buying XZ yuan (even larger) aggressively appreciates yuan far above P1.
Final answer: B
Topic: Foreign exchange rates
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