Suppose That Country a Pegs Its Currency to That of Country

question 45

Multiple Choice

Suppose that country A pegs its currency to that of country B. Now suppose that there is an adverse demand shock in country A. Country B is more likely to cooperate and increase its money supply in response to country A's adverse demand shock when:

• A) country B's output is below its preferred level.
• B) country B is experiencing high rates of inflation.
• C) country B wants country A to devalue its currency.
• D) country A is experiencing high rates of inflation.