Suppose two countries make a credible commitment to fix their bilateral exchange rate.In such a situation,we know that
A)the uncovered interest parity condition no longer holds.
B)the real exchange rate must be constant as well.
C)each country can freely allow its interest rate to diverge from that of the other country.
D)the interest rate in the two countries must be equal.
E) neither country will run a trade deficit.

Question

Quizplus · Accepted Answer

When two countries commit to a fixed exchange rate, the interest rates between the two countries must align to prevent arbitrage opportunities. This is because capital will flow towards the country with a higher interest rate, putting pressure on the fixed exchange rate.

Suppose Two Countries Make a Credible Commitment to Fix Their