Explain how the peg must be maintained

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Reference no: EM13262833

Assume the Columbian central bank decided to peg its currency (the peso) to the U.S. dollar; thus committed to a fixed peso/dollar exchange rate. Use a graph of the foreign exchange market for peso assets to illustrate and explain how the peg must be maintained if there is a shock in the U.S. economy forces the Fed to pursue contractionary monetary policy. Further discuss the ability of central banks to manage domestic economic problems while maintaining a pegged exchange rate?

Reference no: EM13262833

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