Suppose That the US and Europe Maintain a Fixed Exchange

question 31

Essay

Suppose that the US and Europe maintain a fixed exchange rate between themselves.If inflation in the US is 3% and in Europe it is 1%,what would happen to the trade balances between these two countries? Could these countries maintain their fixed exchange rates forever? Why or why not?

---

Definitions:

Flexor Digitorum Longus

A muscle in the lower leg that flexes the toes and helps in walking.

Tibialis Anterior

A muscle in the lower leg that is involved in dorsiflexion and inversion of the foot.

Fibularis Brevis

A muscle located on the lateral part of the lower leg, involved in plantar flexion and eversion of the foot.

Extensor Digitorum Longus

A muscle in the leg that helps in extending the toes and dorsiflexing the foot.