What are some reasons that an "emerging market" country may choose a fixed exchange rate regime?
What will be an ideal response?
While political and monetary institutions are developing, the best monetary policy might be to peg the exchange rate to the currency of a low-inflation economy. Since, in the absence of capital controls, savings will flow into and out of the economy, a credible commitment to low inflation and financial stability is important. Typically, economic growth relies heavily on export performance, which suffers from excessive volatility of the exchange rate. Similarly, a relatively stable exchange rate supports the availability of critical imports. With an exchange-rate peg, domestic economic fluctuations will not be transmitted to the exchange rate, so adverse expectations-driven feedback loops may be avoided.
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Innovation and new ideas are rewarded in a nation with a traditional economy.
a. true b. false
If the Fed raises the discount rate, it:
a. forces commercial banks to call in existing loans. b. changes excess reserves into required reserves. c. changes required reserves into excess reserves. d. none of the above