If a country adopts a currency board arrangement, a result is that the country's money supply __________ be increased by the purchase of domestic assets from the country's citizens by the country's central bank; in this arrangement, the country's money supply __________ be increased by the purchase of foreign assets from the country's citizens by the country's central bank.
A) can; also can
B) can; cannot
C) cannot; can
D) cannot; also cannot

Question

Quizplus · Accepted Answer

In a currency board arrangement, the central bank is required to hold foreign currency reserves equal to the amount of domestic currency in circulation. This means that the central bank cannot increase the money supply by purchasing domestic assets, as that would lead to an increase in the amount of domestic currency in circulation without a corresponding increase in foreign currency reserves. However, the central bank can increase the money supply by purchasing foreign assets, as that would lead to an increase in the amount of foreign currency reserves, which can then be used to issue more domestic currency.

If a Country Adopts a Currency Board Arrangement, a Result