In general, when market expectations indicate a non-credible peg, or when the costs of the peg are not greater than the benefits of pegging, what will be the equilibrium situation?
A) to depreciate
B) to peg
C) uncertain, because in this situation there is no self-fulfilling equilibrium
D) to sell more government bonds

Question

Quizplus · Accepted Answer

When market expectations indicate a non-credible peg, or when the costs of the peg are perceived to outweigh its benefits, the equilibrium situation becomes uncertain. This is because the lack of confidence in the peg's sustainability can lead to speculative attacks or shifts in investment that make the peg difficult to maintain, thus there is no clear, self-fulfilling equilibrium.

In General, When Market Expectations Indicate a Non-Credible Peg, or When