Asymmetric shocks pose a problem for nations linked by fixed exchange rates to a base currency. In general:
A) the home nation always has a better outcome than its foreign trading partner.
B) both nations share a common currency and so will experience equal results.
C) when the base currency nation takes any action to counteract the shock, it forces its exchange rate partner to do the same to maintain its peg.
D) both nations only get half the benefit of any economic policy.

Question

Quizplus · Accepted Answer

Asymmetric shocks occur when one nation experiences an economic shock that the other does not. If the nations are linked by fixed exchange rates to a base currency, such as in a currency peg, then the base currency nation must take action to counteract the shock to maintain its peg. This then forces the exchange rate partner to do the same, thus resulting in both nations being impacted by the shock. Therefore, choice C is the best answer as it acknowledges the need for both nations to take action to maintain the exchange rate peg.

Asymmetric Shocks Pose a Problem for Nations Linked by Fixed