Reference no: EM132939719

Do you agree or disagree with this statement? Why or why not?

Before Switzerland issued the policy to peg the francs at 1.2 per Euro, the world had been dealing with the affects of the financial collapse of 2008. Switzerland, on the other hand, had weathered the storm well and exhibited a stable, growing economy.

Switzerland's growth lured investors and hedge funds to invest in Switzerland's francs which caused the Swiss currency to inflate. The inflation of the currency would have negative effects on Switzerland's economy as export prices would increase with the inflation of the francs and cause the demand on Switzerland's exports to decrease.

Switzerland was forced to "peg" (maintain a price ceiling) the franc at 1.2 per euro in 2011 to prevent an economic collapse and to continue their growth. To do so, Switzerland began purchasing foreign currency which was a way to release more Swiss currency and thus lower the value of the francs (supply and demand).

The effects of such a ceiling (pegging francs to euros) causes the francs to maintain value with that of the euro who are one of Switzerland's major trading partners. Maintaining a currency exchange rate with Europe means Switzerland can continue to trade with Europe and continue Switzerland's economic growth.

Had Switzerland allowed the francs to increase (or float), importing would have increased due to cheaper prices however, the country would have exported less. This imbalance would eventually lead to a trade deficit.