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.

---

Definitions:

Manufacturing Costs

Costs associated with the production of goods, including direct materials, direct labor, and manufacturing overhead.

Insurance Expense

The cost incurred by a business for insurance policies to protect against various risks.

Property Tax

A tax assessed on real estate by the local government, based on the property's value.

Accounts Receivable

Money owed to a company by its customers for goods or services that have been delivered but not yet paid for.