Answer True or False. Briefly explain your answer a) A country fixing its exchan

Question

Answer True or False. Briefly explain your answer

a) A country fixing its exchange rate to the US dollar cannot hold its US dollar exchange rate constant if it sets its domestic interest rate equal to the dollar interest rate. Do not forget to use equations to support your answer. Assume free capital mobility and a credible fixed exchange rate. Explain carefully.

b) At high levels of symmetry and/or integration, above the fix line, it makes sense to fix. At low levels of symmetry and/or integration, below the fix line, it makes sense to float.

c) When real income temporarily decreases, the central bank can maintain the exchange rate fixed at Eo by selling foreign assets.

d) Relative to a country with a fixed exchange rate, an economy with a floating exchange rate is less vulnerable (i.e., its level of output is less sensitive) to shocks coming from the domestic money market (e.g. money demand shocks).

Explanation / Answer

A) True

Most currencies that are pegged to US dollar is to ensure stability of their economy, That does not mean they have interest rates similar to that of United States

B) False

Pegging currency is not for the integration it is for stability to economy, Some small countries currencies must be pegged to US dollar for stability.

C) True

If currency rate goes down then selling foreign assets like dollars in open market would help the economy to gain control

D) True

But it has to be a major economy to float its currency and floating currency is best thing for the country, The most floated currencies are Yen, USD and EURO this explains that floating currency is very useful for the country,

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