In order to stabilize a currency, a currency board needs to
A) use an expansionary monetary policy to offset currency depreciation.
B) use an expansionary monetary policy to offset currency appreciation.
C) use a contractionary policy to offset currency appreciation.
D) None of these are correct.

Question

Quizplus · Accepted Answer

A currency board does not use traditional expansionary or contractionary monetary policies to stabilize a currency. Instead, it pegs the local currency at a fixed exchange rate to a foreign currency, maintaining reserves in that foreign currency to back its own currency's supply.

In Order to Stabilize a Currency, a Currency Board Needs