An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country's exchange rate within a narrow band is a:
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An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country’s exchange rate within a narrow band is a pegged exchange rate system.
In a pegged exchange rate system the:
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This type of system requires a country to use its monetary policy to maintain the desired exchange rate within a narrow range relative to other currencies.
A country that uses a fixed exchange rate system is least likely to:
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Under a fixed exchange rate system, the country gives up discretion about monetary policy and creates domestic currency only up to its holdings of the foreign currency into which it promises to convert the domestic currency. A pegged exchange rate system uses monetary policy to keep the currency’s foreign exchange value within a band relative to a target. A country with a fixed exchange rate remains free to use discretionary fiscal policy. The state of its current and capital accounts will depend on its trade and investment flows.
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