The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Fixed exchange rates require the economic policies of countries linked by the exchange rate to be:
A)completely independent.
B)complementary to each other.
C)determined by the World Bank.
D)similar in nature.
E)determined by the International Monetary Fund.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Fixed exchange rates require the economic policies of countries linked by the exchange rate to be:
A)completely independent. 
B)complementary to each other. 
C)determined by the World Bank. 
D)similar in nature. 
E)determined by the International Monetary Fund.

Quizplus · Accepted Answer

Fixed exchange rates require the economic policies of countries linked by the exchange rate to be similar in nature. This is because if the policies of one country differ significantly from the policies of the other country, it can lead to imbalances in the flow of goods, services, and capital between the two countries, which can affect the exchange rate. For example, if one country has a loose monetary policy and the other country has a tight monetary policy, it can lead to inflation and currency depreciation in the former country, while the latter country can experience deflation and currency appreciation. Therefore, it is essential for the countries linked by fixed exchange rates to have similar policies to maintain stable exchange rates.

The Figure Given Below Depicts the Foreign Exchange Market for British