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

question 309

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:

Electricity Bills

A periodic payment made by consumers for the electricity that they have consumed during a billing cycle.

Interest Rate

The percentage of the principal amount charged by lenders to borrowers for the use of money.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Auto Loan Payments

Regular payments made by a borrower to a lender for the use of borrowed money to purchase an automobile, typically including both principal and interest.