Answer to Question #221091 in Macroeconomics for DARRYL

Question

A.   Now, assuming the economy is open with government (G) participation and  external trade which is summarized as follows; export(X)= 100-0.10Y, import(M)=50, G=100, Taxes(T)= 100 and C, I, M_S, M_t, M_z= speculative money demand

What exchange rate policy should government implement in (iii) to enhance income and why?   

Answer 1

A soft peg exchange rate policy because it is where the government usually allows the exchange rate to be set by the market, but in some cases, especially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene in the market. With a hard peg exchange rate policy, the central bank sets a fixed and unchanging value for the exchange rate. A central bank can implement soft peg and hard peg policies