When policymakers peg the domestic currency to a currency basket that includes only two foreign currencies, they have only two exchange rates to focus on.

Question

Quizplus · Accepted Answer

Pegging to a currency basket means the domestic currency's value is linked to a mix of several currencies, not just the exchange rates with those currencies in the basket. Policymakers must also consider how those currencies interact with each other and with other major currencies globally, affecting the overall value of the domestic currency.

When Policymakers Peg the Domestic Currency to a Currency Basket