Q:
Under a pegged exchange rate system which of the following measures can be undertaken by a home country in order to devalue its currency back to its original peg?
I. Decrease the growth of the money supply in the home market relative to the country to which the home currency is pegged.
II. Reduce the real level of interest rates.
III. Implement measures to stimulate economic growth at home.
IV. Sell some of the foreign currencies in its reserves in exchange for the domestic currency.
a) II and III only.
b) I and IV only.
c) I, II, and IV only.
d) I and II only.
A:
The correct answer is: a)
By reducing the level of real interest rates at home, foreign and domestic investors will invest in some other nation, where they can get a higher real rate of return. However, this process would involve the selling of the home currency, which will result in its devaluation. Similarly, by increasing income levels in the domestic economy, imports will naturally increase. This process too, will involve the selling of the home currency in order to buy the currency of the nation from where the imports are being bought.

RELATED FAQS

  1. Which of the following signatures are required on a client’s new account form ... ...

    The correct answer is B. While local practices of a broker-dealer might require the client to sign the form, even when opening ...
  2. Which of the following are tools that are employed by the Federal Reserve in its ...

    I. Moral suasionII. Changing the discount rateIII. Changing the reserve requirementIV. Changing the prime interest rate A. ...
  3. Which TWO statements are TRUE about writing covered calls? I ...

    The correct answer is c) I is incorrect because there is no margin requirement. III is incorrect because a call writer must ...
  4. Which of the following deliveries for a 600 share order, broker-dealer to broker-dealer ...

    The correct answer is a) Good delivery between broker-dealers means “round lots” of 100 shares, or units that can be made ...
  5. Which statement(s) is/are FALSE about market risk?

    I. It is mitigated by writing calls.II. It includes the risk the investor will lose invested principal.III. It is the same ...
RELATED TERMS
  1. Currency Board

    A monetary authority that makes decisions about the valuation ...
  2. Currency Peg

    A country or government's exchange-rate policy of pegging the ...
  3. Adjustment

    The use of mechanisms by a central bank to influence a home currency's ...
  4. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  5. Currency Substitution

    The use of a foreign currency in transactions in place of the ...
  6. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
Trading Center