Paul Krugman has analyzed fixed currency pegs and the likely cause for them to break. His model is one in which the central bank is under political control, which results in:
A) fiscal dominance by the elected government whereby the central bank must print money to fund government deficits.
B) authority of the central bank to set rules for proper monetary management.
C) the establishment of a currency board to manage the pegged exchange rate.
D) the ability to control the money supply and interest rates to maintain the peg.

Question

Quizplus · Accepted Answer

According to Paul Krugman, fixed currency pegs break when the central bank is under political control, resulting in fiscal dominance by the elected government where the central bank must print money to fund government deficits. This leads to inflation and ultimately the breaking of the currency peg. Options B, C, and D do not address the issue of political control and therefore are not the likely cause for fixed currency pegs to break according to Krugman's analysis.

Paul Krugman Has Analyzed Fixed Currency Pegs and the Likely