What are some reasons that an emerging market country may choose ...

[chads108]

What are some reasons that an emerging market country may choose a fixed exchange rate regime?
 
  What will be an ideal response?

Question 2

If the Fed purchases 1 million in securities from the nonbank public, the monetary base will rise by 1 million
 
  A) if the public holds the proceeds as currency.
  B) if the public deposits the proceeds as checkable deposits.
  C) if the public deposits the proceeds with the Treasury in a monetary base account.
  D) whether the public holds the proceeds as currency or deposits them as checkable deposits.

[yeungji]

Answer to Question 1

While political and monetary institutions are developing, the best monetary policy might be to peg the exchange rate to the currency of a low-inflation economy. Since, in the absence of capital controls, savings will flow into and out of the economy, a credible commitment to low inflation and financial stability is important. Typically, economic growth relies heavily on export performance, which suffers from excessive volatility of the exchange rate. Similarly, a relatively stable exchange rate supports the availability of critical imports. With an exchange-rate peg, domestic economic fluctuations will not be transmitted to the exchange rate, so adverse expectations-driven feedback loops may be avoided.

Answer to Question 2

D