When Analyzing Problems in Maintaining a Fixed Exchange Rate System

question 79

Multiple Choice

When analyzing problems in maintaining a fixed exchange rate system, simplifying assumptions must be made. Which of the following is NOT a simplifying assumption?

• A) The domestic government issues no bonds.
• B) The price level is stable and purchasing power parity (PPP) holds.
• C) Output is exogenous.
• D) Everyone believes the peg will hold, so there is uncovered interest parity (UIP).

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