Which of the following conditions will occur when two countries are engaged in a credible,fixed exchange rate regime? A)E = 1 B)E 1 C)i = i* D)E

Question

Which of the following conditions will occur when two countries are engaged in a credible,fixed exchange rate regime?
A)E = 1
B)E > 1
C)i = i*
D)E < 1

Quizplus · Accepted Answer

In a credible, fixed exchange rate regime, the exchange rate is pegged at a specific level that is deemed credible by the market. This means that the exchange rate will stay fixed at the agreed-upon level. Because of this fixed exchange rate, the interest rates in the two countries will also be fixed at the same level (i = i*). Therefore, choice C is the correct answer. Choices A, B, and D are not relevant to a fixed exchange rate regime.

Which of the Following Conditions Will Occur When Two Countries