Question

Effect of currency peg on currency stability, level and stability of interest rates, ability to use fiscal and monetary policy to affect real economic growth.

A. Increases stability, lowers interest rates, limits policy effectiveness
B. Decreases stability, raises interest rates, enhances policy effectiveness
C. Increases stability, raises interest rates, enhances policy effectiveness
D. Decreases stability, lowers interest rates, limits policy effectiveness

Answer 1

A currency peg generally increases currency stability and may lead to lower interest rates, but it limits the effectiveness of fiscal and monetary policy in addressing domestic economic issues, with the best described outcome being Option A.

Step-by-step explanation:

When a government pegs its currency to another currency, several economic outcomes may be expected, including an impact on the currency stability, interest rates, and the effectiveness of fiscal and monetary policy to affect real economic growth.

A pegged exchange rate means the country's monetary policy becomes intricately linked to maintaining the peg, which can limit policy effectiveness in responding to domestic economic conditions. This inherently places constraints on using monetary policy tools for managing inflation or addressing economic recessions.