Video transcript
Work It Out, Chapter 20, Question 6
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The question will ask how the answer to part (e) would change if the future deficits are anticipated?
If continually increasing deficits are anticipated, people will speculate that the fixed rate is going to break in the near future, which would be followed by a sharp depreciation of the currency.
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Not wanting to hold a currency that will eventually depreciate, knowledgeable investors reduce their demand for the dollar now.
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This speculative attack eats up the remaining reserves in as much as the central bank tries to defend the peg, and the break form the fixed exchange rate comes much sooner than it would have in the unanticipated case.
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