Suppose That Econland Adopts a Fixed Exchange-Rate System and Pegs

question 107

Multiple Choice

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.

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Definitions:

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded by consumers over a given period.

Price-Elasticity Coefficients

Numerical values that measure the responsiveness of quantity demanded or supplied to a change in price; they help in assessing how price changes impact demand or supply levels.

Demand Schedules

A table that shows the quantity of a good or service that consumers are willing and able to purchase at various prices during a specified period.

Demand Elastic

Describes how sensitive the quantity demanded of a product is to a change in its price.