Which of the following conditions will occur when two countries are engaged in a credible, fixed exchange rate regime? A) E 1. B) i i*. C) i = i*. D) i

Question

Which of the following conditions will occur when two countries are engaged in a credible, fixed exchange rate regime? A) E > 1. B) i > i*. C) i = i*. D) i < i*. E) E < 1.

Quizplus · Accepted Answer

In a credible, fixed exchange rate regime, the exchange rate is fixed by the central banks of the two countries. This implies that the exchange rate (E) is constant and does not vary. Therefore, the interest rate (i) in one country should be equal to the interest rate (i*) in the other country, so that there are no arbitrage opportunities. Hence, the correct choice is C, i = i*.

Which of the Following Conditions Will Occur When Two Countries