Why might a developing country choose to peg the value of its ...

[bobypop]

Why might a developing country choose to peg the value of its currency to the dollar?
 
  What will be an ideal response?

Question 2

The Fed can change the money supply more quickly by using open market operations as compared to discount policy.
 
  Indicate whether the statement is true or false

[yeungji]

Answer to Question 1

The dollar is a relatively stable currency, so by pegging the value of a country's currency to the dollar, the country provides reassurance that debts will be paid in a currency whose value doesn't fluctuate dramatically. This reduces the risk foreigners face in collecting returns on investments in that country. In addition, if imports are a significant fraction of the goods consumers buy, a decrease in the value of the country's currency can result in higher inflation. By pegging the country's currency, these fluctuations in the exchange rate don't occur, so inflation may be lower.

Answer to Question 2

TRUE