With a credible peg, whenever there is a rise in the foreign interest rate:
A) there is a drop in the domestic interest rate.
B) the exchange rate changes.
C) there is an equal rise in the domestic interest rate.
D) there will be no change in the domestic interest rate.

Question

Quizplus · Accepted Answer

With a credible peg, the domestic interest rate typically moves in tandem with the foreign interest rate to maintain the pegged exchange rate. This means that if the foreign interest rate rises, the domestic interest rate will also rise to prevent capital outflow and maintain the peg.

With a Credible Peg, Whenever There Is a Rise in the Foreign