a. Ecuador is currently dollarized: Bank accounts are denominated in U.S. dollars, for example. If Ecuadoreans believe rumors that the country is going to go off the dollar and convert all bank account deposits into a new unit of money called “Ecuado” (similar to what Argentina actually did in 2001), what will this probably do to the Ecuadorean banking system?
b. “There is no such thing as a fixed exchange rate: Just pegs that haven’t been changed . . . yet.” Explain how this belief, by itself, can make it difficult for a country to maintain a fixed exchange rate. Does this belief have a direct impact on the demand for a currency or on the supply of a currency?