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

question 68

Multiple Choice

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (cooperatively) 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 impact of the demand shock).
• C) The devaluing nation 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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