The benefits of a fixed exchange rate system may be particularly high for a country that has history of __________ inflation.If such a country fixes its currency to the __________ currency of a country with __________ inflation,it may also be able to achieve ___________ inflation.

Question

Quizplus · Accepted Answer

A country with a history of high inflation may benefit from a fixed exchange rate system if it fixes its currency to a stronger currency of a country with low or moderate inflation. This helps to anchor inflation expectations and reduce inflation in the high-inflation country. Choice (A) is incorrect because fixing to a moderate inflation currency may not be as effective. Choice (C) is incorrect because fixing to a weaker currency may not provide the credibility needed to reduce inflation. Choice (D) is incorrect because it assumes that fixing to a weaker currency will always result in low inflation, which may not be the case. Choice (E) is semi-correct, but it overlooks the importance of fixing to a stronger currency to achieve lower inflation.

The Benefits of a Fixed Exchange Rate System May Be