From the late 1990s into the early 2000s, Hong Kong suffered from deflation. Most economists believed that the period of deflation ended and that inflation would begin to pick up slowly. Prices, however, were believed to be held in check because the Hong Kong dollar is pegged to the U.S. dollar. What does the monetary authority in Hong Kong have to do to peg its dollar to the U.S. dollar?
A. It will sell Hong Kong dollars when the price of the Hong Kong dollar rises and buy them when the price of the Hong Kong dollar drops.
B. It will raise tariffs when the value of the Hong Kong dollar falls and lower them when the value of the Hong Kong dollar rises.
C. It does not allow free trade in U.S. dollars; the foreign exchange market is illegal.
D. It will sell Hong Kong dollars when the price of the Hong Kong dollar drops and buy them when the price of the Hong Kong dollar rises.
Answer: A
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