Question

If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country’s central bank be forced to undertake, and what effect would the intervention have on the country’s international reserves and money supply?

Short answer

If country's par rate of exchange was undervalued during the Bretton woods charge per unit system, then the financial organization of that country is forced to intervene within the interchange market by purchase of the currency from the exchange market.

Thus, the financial organisation would purchase the currency from exchange market which can reduce its international reserves and funds.

Step-by-step solution

Concept Introduction

Bretton woods rate regime refers to the fixed rate system under which U.S dollar was kept as reserve currency and intervention of financial organization was required within the interchange market to stay the fixed rate of exchange.

Explanation of Solution

The purchase of the currency by the financial organization would increase the demand for the currency which is able to increase the worth of that currency within the exchange market and also the fixed rate of exchange can be maintained. the acquisition of the domestic currency would happen in exchange of foreign currency which might reduce the international reserves in this country and therefore the purchase of domestic currency by the financial organisation would also reduce the cash supply of that currency within the exchange market.