Question

A drawback to using changes in domestic credit to adjust the domestic money supply to maintain a peg: A) is problems in emerging market economies as a result of bond market instability.B) is the lack of expertise in financial matters in the central banks of emerging markets. C) is the requirement that currencies flip flop from fixed to floating. D) is that nations are ignoring a potentially more effective source of currency adjustment.

Answer 1

Answer: The most correct Option is option A) is problems in emerging market economies as a result of bond market instability.

Explanation: The question explains why it has been difficult for a nation to control the value of it's money, so as to achieve a fixed exchange rate with other currencies. This is because the bond market is not stable. This bond market is what the central bank uses to control the flow of money into the economy, to avoid depreciation or inflation of the economy. Because the market is not stable due to the rate of bond demand is not stable. This will make it difficult for the central bank to keep a fixed rate of MPR (monetary policy rate) and loans.

Even though all the options are related to the issue, but option A. is directly linked to the question. This can be seen by someone, that the central banks are having brain drain, because it is one of the major issue all central banks are facing. It can also be seen as a reason why money fluctuate. It can also be seen that nation's has ignored to Source more form of regulating money. But due to the fact that bond market instability is the major problem leading to all this. Option A. still remains the answer.