Question

Which of the following statement is FALSE? Group of answer choices

A. It is difficult to maintain the peg when a country experiences major political or economic problems.
B. Most large developed countries such as the United States, the United Kingdom, Australia, Canada, and Japan combine government intervention with market forces to set exchange rates.
C. The interest rates of pegged currency will move in tandem. In other words, if Country A’s currency is pegged to Country B’s, when Country B raises its interest rate, Country A will also raise its interest rate.
D. Dollarization (i.e., replacing the local currency with U.S. dollar) is a step further beyond the currency board because it forces the local currency to be replaced with the U.S. dollar.
E. A free-floating FX regime does not require central bank to maintain exchange rates within specified boundaries.

Answer 1

The false statement is B, which incorrectly says large developed countries combine intervention with market forces for exchange rates; these countries use floating exchange rate policies.

Step-by-step explanation:

The false statement among the options provided is B, which claims that most large developed countries such as the United States, the United Kingdom, Australia, Canada, and Japan combine government intervention with market forces to set exchange rates. In reality, these countries generally have floating exchange rate regimes, where the market largely determines the exchange rates without direct government control.

Regarding the other options, A is true because it is difficult to maintain a peg during major political or economic problems due to the pressure these issues put on a nation's currency. Option C is typically correct because when a country pegs its currency to another's, it often aligns its interest rates with the nation to which it is pegged to maintain the peg. For option D, dollarization indeed involves replacing a local currency with the U.S. dollar, thus eliminating the local currency entirely. Lastly, E is a true statement as a free-floating FX regime allows exchange rates to fluctuate according to market forces without central bank intervention to maintain specific boundaries.