From the late 1990s into the early 2000s, Hong Kong suffered from deflation. Most economists believed that the period of deflation ended and that inflation would begin to pick up slowly. Prices, however, were believed to be held in check because the Hong Kong dollar is pegged to the U.S. dollar. What does the monetary authority in Hong Kong have to do to peg its dollar to the U.S. dollar?

Question

Quizplus · Accepted Answer

To peg its currency to the U.S. dollar, the monetary authority in Hong Kong must intervene in the foreign exchange market by selling Hong Kong dollars when their price rises (to prevent the currency from becoming too strong) and buying them when their price drops (to prevent the currency from becoming too weak), maintaining a stable exchange rate with the U.S. dollar.

From the Late 1990s into the Early 2000s, Hong Kong