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Domestic costs remaining in line with foreign costs

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A second issue concerns how long the fixed exchange rate could be maintained. The exchange rate, of course, depends on an uncertain future, but if the initial value chosen was appropriate and if domestic costs remained in line with foreign costs, then the rate may be sustainable for some time.

a. What is meant by domestic costs remaining in line with foreign costs?

b. What would happen if domestic costs exceeded foreign costs?

Reference no: EM131258429

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