Which of the following is a characteristic of a currency board?
A)A currency board focuses on maintaining a floating exchange-rate.
B)A currency board issues domestic currency liabilities only in exchange for foreign currency assets.
C)A currency board frequently carries out sterilized intervention in order to maintain the fixed rate.
D)A currency board insulates the country from adverse foreign shocks by prescribing effective fiscal and regulatory policies.

Question

Quizplus · Accepted Answer

A currency board issues domestic currency liabilities (such as banknotes and coins) only in exchange for foreign currency assets (such as US dollars or euros). This ensures that the currency board holds sufficient foreign reserves to back up the value of the domestic currency at a fixed exchange rate. Maintaining a fixed exchange rate is the main goal of a currency board, not maintaining a floating exchange rate. Sterilized intervention is not frequently used by currency boards as they rely on the discipline of the fixed exchange rate system to avoid excessive money creation. Although a currency board may prescribe effective fiscal and regulatory policies, this is not a defining characteristic of a currency board.

Which of the Following Is a Characteristic of a Currency