Limiting net external wealth effects could be accomplished by limiting movements in the exchange rate. What measure might address this situation?
A) devaluing the currency
B) keeping nominal interest rates exactly 1% higher than one's trading partners
C) borrowing only in U.S. dollars
D) pegging the exchange rate to the currency of the largest creditor nation

Question

Quizplus · Accepted Answer

Pegging the exchange rate to the currency of the largest creditor nation would limit movements in the exchange rate and therefore limit net external wealth effects. This would provide stability for trade and investment, reducing the risk of sudden shifts in wealth due to exchange rate fluctuations. A devaluation of the currency (choice A) would have the opposite effect, as it would entail a sudden and dramatic shift in the exchange rate. Keeping nominal interest rates higher than one's trading partners (choice B) and borrowing only in U.S. dollars (choice C) would have limited impact on net external wealth effects, as they are not directly related to exchange rate stability.

Limiting Net External Wealth Effects Could Be Accomplished by Limiting