For a Country to Successfully Maintain a Fixed Exchange Rate

question 53

Multiple Choice

For a country to successfully maintain a fixed exchange rate value of its currency relative to another currency (for example, as is done when currencies are unified or pegged) , it must

• A) maintain a relatively high rate of inflation.
• B) balance the government budget each year.
• C) give up the independence of its monetary policy.
• D) run a trade deficit.

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Definitions:

Market Price

The prevailing cost at which one can buy or sell an asset or service.

Marginal Cost

The augmentation in total costs associated with the production of an additional unit of a product or service.

Cartel

A group of independent market participants who collude to control prices and production in order to monopolize a market.

Fixed Cost

Costs that do not change with the level of output, such as rent or salaries.