How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible?
A)By taking opposing positions in the forward foreign exchange market to maintain a zero exposure stance at all points in time
B)By allowing its exchange rate to fluctuate against other currencies within a target zone
C)By holding foreign currency reserves equal at the fixed exchange rate to at least 100 percent of the domestic currency issued
D)By having no separate legal tender of its own

Question

Quizplus · Accepted Answer

A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.To make this commitment credible,the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.

How Does a Country That Introduces a Currency Board Make