If a Country Pegs Its Currency to a Foreign Currency

question 54

Multiple Choice

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

• A)it no longer has a central bank.
• B)monetary policy must be used to keep the exchange rate's market equilibrium value at its official value.
• C)banks will begin to hold 100 percent of their deposits in reserves.
• D)it must eliminate its currency from circulation and replace it with the foreign currency.

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Definitions:

Probability

The determination of an event's likelihood, represented numerically from 0 to 1.

Moral Hazard

A situation in which one party engages in risky behavior or lacks incentive to guard against risk because another party bears the consequences.

Adverse Selection

A phenomenon where parties at a disadvantage due to asymmetric information are selected against in a market transaction, often leading to market failure.

Unobservable Actions

Actions taken by individuals or entities that cannot be seen or measured directly, often inferring effects through outcomes or reports.