Suppose foreign exchange markets anticipate a revaluation for country A. Further assume that policy makers in country A will continue to fix its nominal exchange rate. In order to peg the currency at its original level, which of the following must occur?

Question

Quizplus · Accepted Answer

In order to peg the currency at its original level, policy makers in country A must decrease their domestic interest rate. This will make their currency less attractive to foreign investors, decreasing demand for their currency and thus keeping their exchange rate at the original level. The other choices are not directly related to maintaining a fixed nominal exchange rate.

Suppose Foreign Exchange Markets Anticipate a Revaluation for Country A Further