If two countries have a fixed exchange rate, they will both have

Question

Quizplus · Accepted Answer

With a fixed exchange rate, the central banks of both countries need to adjust their interest rates in the same direction to maintain the pegged exchange rate. This means that interest rates in both countries will move in the same direction. However, this does not necessarily lead to lower inflation or more stable economies. Differential interest rates (as mentioned in choice D) would only occur if one country breaks the pegged exchange rate. Interest rates moving in the opposite direction (as mentioned in choice E) cannot happen with a fixed exchange rate.

If Two Countries Have a Fixed Exchange Rate, They Will