Expected depreciation threatens a peg because of all the following, EXCEPT:
A) when investors expect the peg to fail it will fail in multiple equilibrium situations.
B) market sentiment will raise the currency premium and lower confidence.
C) economic fundamentals are crucial to whether a peg holds or fails.
D) investor confidence may wane and cause a rise in interest rates.

Question

Quizplus · Accepted Answer

Expected depreciation threatens a peg because it puts pressure on the currency and the peg may become unsustainable. However, economic fundamentals are not directly related to the expectation of depreciation and therefore do not threaten the peg. Factors such as investor confidence, market sentiment and the possibility of multiple equilibrium situations all contribute to the threat of a peg failing.

Expected Depreciation Threatens a Peg Because of All the Following