You live in a small country that suffers constantly from high and variable rates of inflation. You are quite sure it has something to do with the fact that the head of the central bank is the President's brother. A rival presidential candidate is advocating fixing the exchange rate between your country's currency and the dollar. What are the advantages to this proposal and how do you think the current head of the central bank will respond?
What will be an ideal response?
The idea is a good one from the standpoint that fixing the currency value to that of another country means adopting the monetary policy of the other country. The problem in this country is that there is obviously not an independent central bank and this lack of independence is causing high and volatile inflation. By fixing the exchange rate to the dollar your country will be adopting the monetary policy of the U.S., which has the advantages of both offering lower and (it is hoped) more stable inflation, but also creating independence between the President and the central bank. As a result, the current head of the central bank in this country will lose a lot of their power and is likely not to favor the move to fixing the exchange rate.
You might also like to view...
When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs
a. along the highest attainable indifference curve. b. where the indifference curve is tangent to the budget constraint. c. where the marginal utility per dollar spent is the same for both X and Y. d. All of the above are correct.
Eliminating means requirements for government benefits would
a. raise saving and primarily benefit people with lower incomes. b. raise saving but primarily benefit people with higher incomes. c. reduce saving but primarily benefit people with lower incomes. d. reduce saving and primarily benefit people with higher income.
The demand curve in the figure above illustrates the demand for a product with
A) zero price elasticity of demand at all prices. B) infinite price elasticity of demand. C) unit price elasticity of demand at all prices. D) a price elasticity of demand that is different at all prices.
The dates of the "official" peaks and troughs of business cycles in the United States are determined by the:
A. Congressional Budget Office. B. Federal Reserve Board. C. Council of Economic Advisers. D. National Bureau of Economic Research