Aruba pegs its currency (the Aruban florin) to the U.S. dollar at a rate of Af 2 = $US1. Suppose that the actual exchange rate is equal to this pegged rate. Suppose that Aruba's money supply is Af 20 billion and Aruba's central bank holds $5 billion of dollar reserves and Af 10 billion of domestic bonds. What is the backing ratio for Aruban florins?

Question

Quizplus · Accepted Answer

The backing ratio is the ratio of a currency's reserves to its monetary base. The monetary base of Aruba is Af 20 billion, while its reserves are worth $5 billion, which when converted to florins at the exchange rate of Af 2 = $1 is Af 10 billion. Therefore, the backing ratio is 10/20 = 50%.

Aruba Pegs Its Currency (The Aruban Florin) to the U