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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