Suppose Country a Pegs Its Nominal Exchange Rate to Country

question 40

Multiple Choice

Suppose country A pegs its nominal exchange rate to country B and that country A has a higher inflation rate than country B.In this situation,country A will experience

• A)a real appreciation.
• B)a worsening trade position.
• C)an increase in the real exchange rate.
• D)all of the above
• E) none of the above

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Definitions:

Market Rate

The prevailing interest rate available in the general market.

Maturity Value

The amount that will be paid to the holder of a financial instrument at its maturity date, including principal and any remaining interest.

Premium

The amount paid for an insurance policy or the amount by which a bond or stock's value exceeds its underlying or face value.

Market Rate

The prevailing interest rate available in the marketplace for securities, loans, and deposits.