In a noncooperative pegged situation, when the home country devalues in response to an external shock the:
A) foreign nation will also devalue, endangering the peg.
B) home country suffers the entire burden.
C) resulting depreciation causes a large shift in demand from the foreign nation to the home country, thereby exporting the recession to the foreign nation.
D) nations agree to switch their peg to the U.S. dollar.

Question

Quizplus · Accepted Answer

In a noncooperative pegged situation, when the home country devalues its currency in response to an external shock, it makes its goods cheaper relative to the foreign nation's goods. This causes a shift in demand from the foreign nation to the home country, effectively exporting the recession or economic downturn to the foreign nation by improving the home country's trade balance at the expense of the foreign nation's economy.

In a Noncooperative Pegged Situation, When the Home Country Devalues