Which of the following statements is true about a currency board system?
A)Under a strict currency board system,interest rates adjust automatically based on the supply and demand of domestic currency.
B)To convert domestic currency on demand into another currency,a currency board takes grants from the International Monetary Fund.
C)This system is a true fixed exchange rate regime,because the domestic currency is fixed against other currencies.
D)A currency board can issue additional domestic currency even when there are no foreign exchange reserves to back it.
E)A currency board authorizes the government to print money and set interest rates.

Question

Quizplus · Accepted Answer

Under a currency board system, the exchange rate is fixed, and the central bank is required to hold foreign reserves equal to the amount of domestic currency issued. Interest rates adjust automatically based on the supply and demand of domestic currency. Therefore, option A is the correct statement. Option B is incorrect because currency boards do not take grants from the International Monetary Fund. Option C is partially correct, as currency board systems are a form of fixed exchange rate regime, but not all fixed exchange rate regimes necessarily adopt a currency board system. Option D is incorrect because a currency board cannot issue additional domestic currency without sufficient foreign reserves. Option E is incorrect because a currency board is an independent institution responsible for maintaining a fixed exchange rate, while the government cannot print money and set interest rates.

Which of the Following Statements Is True About a Currency