Suppose there are two countries that decide to peg the exchange rate at its current rate, which of the following must be true in the short run?
A) Output growth rates must be equal in the two countries.
B) Price levels must be equal in the two countries.
C) Inflation rates must be equal in the two countries.
D) The real exchange rates between the two countries will be equal.
E) The interest rates must be equal in the two countries.

Question

Quizplus · Accepted Answer

In the short run, for a pegged exchange rate system to be sustainable, the interest rates in the two countries must be equal to prevent arbitrage opportunities and maintain the fixed exchange rate.

Suppose There Are Two Countries That Decide to Peg the Exchange