If a small country, such as Argentina, attempts to fix its currency exchange rate with the United States,
A)its inflation rate must be higher than the U.S.inflation rate.
B)its interest rates will move together with the U.S.interest rates.
C)its currency value relative to the U.S.dollar will fluctuate over time.
D)its central bank will have full flexibility in monetary policy actions.
E)it must restrict the flow of funds with the United States.

Question

Quizplus · Accepted Answer

When a small country fixes its currency exchange rate with a larger country like the United States, its interest rates tend to move in tandem with the interest rates of the larger country. This is because the fixed exchange rate necessitates adjustments in the smaller country's monetary policy to maintain the peg, often leading to interest rate changes that mirror those in the larger country to prevent capital flows that could destabilize the fixed exchange rate.

If a Small Country, Such as Argentina, Attempts to Fix