Weighing the costs and benefits of maintaining the peg would involve comparing the cost of:
A) output gaps and a slower economy versus the benefits from additional trade.
B) fixed prices versus the benefits of higher interest rates.
C) a trade deficit versus the benefits of greater economic growth.
D) international instability versus the benefits of lower rates of interest.

Question

Quizplus · Accepted Answer

Maintaining a pegged exchange rate can lead to output gaps and a slower economy, as the central bank may need to raise interest rates to defend the peg. However, it may also bring the benefits of increased trade. Therefore, weighing the costs and benefits of maintaining the peg would involve comparing these factors. Option B is incorrect, as fixed prices are a characteristic of a pegged exchange rate and not a cost. Option C is also incorrect, as the trade deficit is a result of other factors and not directly related to maintaining the peg. Option D is not relevant, as international instability is not a direct cost of maintaining a pegged exchange rate.

Weighing the Costs and Benefits of Maintaining the Peg Would