Question
Suppose there are two countries, country A with currency X and country B with currency Y. Country A pegs its currency X to currency Y
Suppose there are two countries, country A with currency X and country B with currency Y. Country A pegs its currency X to currency Y of country B at a fixed exchange rate of 2X=1Y. If traders think that the reasonable exchange rate should be 3X =1Y, and the Central Bank of country a still wants to fix the exchange rate at 2X = Y; In order to maintain the exchange rate of 2X = 1Y, the Central Bank of country a began to buy X currency and sell Y currency in the money market.
Question:
If the Central Bank of country a fails to control the exchange rate at 2X = 1Y after buying currency X and selling currencyY, how will the economic situation and financial market of country A being affected?
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