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Priya Bhagat
on Dec 19, 2024

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Suppose that Econland adopts a fixed exchange-rate system and pegs the value of its peso to the U.S. dollar. Which of the following statements is true?

A) Econland's government will have a limited capacity to maintain the peg at the current level if the supply of dollars in the foreign exchange market is continually rising.
B) Econland's government will have a limited capacity to maintain the peg at the current level if the demand for pesos in the foreign exchange market is continually falling.
C) Econland's government will have a limited capacity to maintain the peg at the current level if the demand for Econland's products in the world market is strongly rising.
D) Econland's government will have a limited capacity to maintain the peg at the current level if the demand for U.S. products in Econland is sharply falling.

Fixed Exchange-rate System

A currency value regime where a country's currency is pegged at a set value to another currency, a basket of currencies, or a commodity like gold.

Foreign Exchange Market

A global decentralized or over-the-counter market for trading currencies, facilitating international trade and investment.

Peg

Fixing the exchange rate of a currency by linking it to another currency or basket of currencies.

  • Analyze the impact of exchange rate systems on international trade and financial transactions.
  • Identify the tools and policies used to maintain fixed exchange rates.
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Sandrine TurenneDec 19, 2024
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