Suppose a country that has been pegging its currency is faced with a situation where financial market participants now expect some future devaluation. In such a situation, we would generally expect which of the following to occur?

A) a reduction in the domestic interest rate
B) an announcement by the central bank that a large devaluation will occur in the near future
C) reduction in demand for the country’s currency
D) all of the above
E) none of the above

ANSWER:

A