Multiple Choice
If the European Union (EU) were to devalue the euro, which of the following would most likely occur?
23. Exchange Rates
Exchange Rates: Introduction
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Why might a country choose to peg its currency to the US dollar?
A
To eliminate the need for monetary policy
B
To promote exchange rate stability and facilitate international trade
C
To discourage foreign investment and reduce exports
D
To increase the volatility of its currency in global markets
Verified step by step guidance1
Understand the concept of a currency peg: A country fixes its currency's value to another currency, such as the US dollar, to maintain a stable exchange rate.
Recognize the main goal of pegging: It is primarily done to promote exchange rate stability, which reduces uncertainty in international transactions.
Consider the benefits of exchange rate stability: Stable exchange rates facilitate international trade and investment by making prices predictable and reducing currency risk.
Evaluate the incorrect options: Pegging does not eliminate the need for monetary policy, nor does it aim to discourage foreign investment or increase currency volatility.
Conclude that the most logical reason for pegging a currency to the US dollar is to promote exchange rate stability and facilitate international trade.
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