A Number of Situations Can Arise That Will Cause Individuals

Multiple Choice

A number of situations can arise that will cause individuals to believe that policy makers might change the pegged value of a fixed exchange rate.Suppose financial market participants expect a revaluation in the future.The interest parity condition will be maintained if which of the following policy actions are taken in the current period?

A) a reduction in the pegged value of the domestic currency
B) an increase in i
C) a reduction in i
D) an increase in government spending