The Pugelovian government is attempting to peg the exchange-rate value of its currency (the pnut, pronounced p’noot)

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QUESTION:

The Pugelovian government is attempting to peg the exchange-rate value of its currency (the pnut, pronounced “p’noot”) at a rate of three pnuts per U.S. dollar (plus or minus 2 percent). Unfortunately, private market supply and demand is putting downward pressure on the pnut’s exchange-rate value. In fact, it appears that, under current market conditions, the exchange rate would be about 3.5 pnuts per dollar if the government did not defend the pegged rate.

a. How could the Pugelovian government use official intervention in the foreign exchange market to defend the pegged exchange rate?

b. How could the Pugelovian government use exchange controls to defend the pegged exchange rate?

c. How could the Pugelovian government use domestic interest rates to defend the pegged exchange rate?


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