Imagine the following scenario: The central bank of Neverland ensures that the exchange rate between the Neverland dollar and the U.S. dollar is fixed. Due to a global financial crisis the demand for U.S. dollars goes up and the demand for Neverland dollars goes down. First, the Neverland's central bank spends U.S. dollar reserves to support the peg but then it runs out of reserves. What is most likely to happen next? OA. the Neverland dollar's exchange rate with respect to U.S. dollar (i.e., the price of Neverland dollars in U.S. dollars) will go up OB. the Neverland dollar's exchange rate with respect to U.S. dollar will go down OC. the Neverland dollar's exchange rate with respect to U.S. dollar will not change D. the stock market index of the Neverland stock exchange will go up

Imagine the following scenario: The central bank of Neverland ensures that the exchange rate between the Neverland dollar and the U.S. dollar is fixed. Due to a global financial crisis the demand for U.S. dollars goes up and the demand for Neverland dollars goes down. First, the Neverland's central bank spends U.S. dollar reserves to support the peg but then it runs out of reserves. What is most likely to happen next? OA. the Neverland dollar's exchange rate with respect to U.S. dollar (i.e., the price of Neverland dollars in U.S. dollars) will go up OB. the Neverland dollar's exchange rate with respect to U.S. dollar will go down OC. the Neverland dollar's exchange rate with respect to U.S. dollar will not change D. the stock market index of the Neverland stock exchange will go up

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 8PA

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Similar questions

This chapter has explained that one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system, if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?
Suppose U.S. interest rates decline compared to the rest of the world. What would be the likely impact on the demand for dollars, supply of dollars, and exchange rate for dollars compared to, say, euros?
What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization?
Is a country for which imports and exports comprise a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?
Why does the trade balance and the current account balance track so closely together over time?
How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?
Do you think that a country experiencing hyperinflation is more or less likely to have an exchange rate equal to its purchasing power parity value when compared to a country with a low inflation rate?