In general, when there is a large shock to domestic output, the government finds:
A) it is less difficult to maintain the peg.
B) maintaining the peg carries a higher present and future cost, especially if credibility is low.
C) it is impossible to maintain the peg.
D) central bankers are insensitive to the concerns of the population.

Question

Quizplus · Accepted Answer

When there is a large shock to domestic output, maintaining the peg carries a higher present and future cost, especially if credibility is low. The government may have to spend a significant amount of foreign reserves to defend the peg, which can lead to a depletion of these reserves and hurt the country's ability to pay for imports. Additionally, if the government has a history of not honoring its commitments, its credibility may be low, and market participants may expect the peg to be abandoned in the future, leading to speculative attacks on the currency. Overall, maintaining the peg can be costly, and the government needs to assess whether it is worth it.

In General, When There Is a Large Shock to Domestic