If Two Nations Both Peg to a Center Nation, and One

question 164

Multiple Choice

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (noncooperatively) and to the center as a result of a demand shock, what is the effect?

• A) The center nation will require that the two line up their rates.
• B) The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the effect of the demand shock).
• C) The devaluing nation will devalue more steeply and will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation).
• D) Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

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Definitions:

Failure

The state or condition of not meeting a desirable or intended objective, often leading to a sense of loss, frustration, or disappointment.

Retroactive Interference

A phenomenon where newly learned information interferes with the recall of previously learned information.

Recall

The act of recalling information from previous experiences.

New Information

Refers to data or knowledge received or discovered which was previously unknown, often changing understanding or perspective.