You are the economic advisor to Sir Bufton Tufton, the Prime Minister of Perfidia The Bank of Perfidia is pegging the exchange rate of the local currency, the Perfidian albion The albion is pegged to the wotan, which is the currency of the neighboring country of Wagneria Until this week both countr...

Each statement is designed to either affect or address investors expectations a By abandoning the peg the central bank is free to conduct monetary pol ...

You are the economic advisor to Sir Bufton Tufton, the Prime Minister of Perfidia. The Bank of

Question:

You are the economic advisor to Sir Bufton Tufton, the Prime Minister of Perfidia. The Bank of Perfidia is pegging the of the local currency, the Perfidian albion. The albion is pegged to the wotan, which is the currency of the neighboring country of Wagneria. Until this week both countries have been at full employment. This morning, new data showed that Perfidia was in a mild recession, 1% below desired output. Tufton believes a downturn of 1% or less is economically and politically acceptable but a larger downturn is not. He must face the press in 15 minutes and is considering making one of three statements:
a. “We will abandon the peg to the wotan immediately.”
b. “Our policies will not change unless economic conditions deteriorate further.”
c. “We shall never surrender our peg to the wotan.”
What would you say to Tufton concerning the merits of each statement?
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...