Central bank have to respond in order to currency peg

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Reference no: EM131348258

Oil prices reached above $100 a barrel several years ago. Suppose you are a member of the monetary policy committee of a small open economy, dependent on oil imports, which also wants to maintain a currency peg to the dollar.

(a) Describe the pressures that the currency would face due to the increase in oil prices? (Hint: think about the e⁄ects of the higher oil prices on the domestic price level as well as the current account). How would the central bank have to respond in order to maintain the currency peg?

Reference no: EM131348258

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