Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. How would the European Central Bank's monetary policy affect European interest rates

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Imogen

10 May, 01:29

Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. How would the European Central Bank's monetary policy affect European interest rates

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Matthias Kidd · Answer 1

They would rise

Explanation:

Although interest rates alone do not determine the value of foriegn exchange rates, what is true is that ''the higher interest rates, the higher the attraction of foreign investment, which increases the 'demand for' and 'value of' the home country's currency.

Therefore pegging the euro to the pound which is a higher currency will imply that the value of the euro is increasing and the value of interest rate in Europe will rise accordingly.