Posted by remy on .
I need some help in this question, thanks.
Suppose that a Home country has many trading partners and each
trading partner has its own currency.
(a) If each trading partner allows its currency to float, is it possible for
Home to fix its exchange rate against all of its trading partners?
(b) If Home wishes to reduce the variability of its effective exchange rate, what kind of exchange rate regime might it choose?
a) could only work if the Home country was extremely large, relative to the sum of all the other countries. Otherwise you would have a knife-edge problem; either all the other countries would hold the Home contries currency or none of them would. For more info, google "Walrus Law"
b) It could express its currency in terms of a precious commodity (e.g., gold). Google the Gold Standard