Final answer:
A hard peg exchange rate policy is a fixed system where a country's currency is tied to another currency or value. It offers stability but compromises independent monetary policy. To achieve a hard peg, a central bank can buy and sell bonds in the open market.
Step-by-step explanation:
A hard peg exchange rate policy is a fixed exchange rate system where a country's currency is tied to another currency or a fixed value. In this system, the exchange rate is not allowed to fluctuate in the short term, and the government must maintain high levels of foreign exchange reserves to support the fixed rate. An example of a hard peg is the Chinese yuan's peg to the US dollar, where the exchange rate is kept within a narrow band.
The advantage of a hard peg is that it provides stability and certainty for businesses and consumers, as the exchange rate remains constant. However, disadvantages include the loss of independent monetary policy, as the country must prioritize maintaining the peg over addressing inflation or recession. In the event that a country abandons a hard peg, there can be a dramatic shift in the exchange rate, leading to potential financial instability.
Therefore, the correct answer for achieving a hard peg, as stated in the question, is d. buying and selling bonds in the open market. By actively buying and selling bonds, a central bank can influence the exchange rate and maintain the desired peg.