The exchange rate arrangement whereby the nation fixes the exchange rate and allows the nation's money supply to increase or decrease only in response to balance-of-payments surpluses or deficit is known as (a):
A)Currency board arrangements
B)Dollarization
C)Crawling peg system
D)Managed floating exchange rate system

Question

Quizplus · Accepted Answer

In a currency board arrangement, a country fixes its exchange rate to a foreign currency, typically that of a major economic power such as the US dollar or Euro. The central bank of the country then ensures that the value of its domestic currency remains fixed to the foreign currency by holding large reserves of the foreign currency. The domestic money supply can only increase or decrease in response to inflows or outflows of foreign currency, i.e., balance-of-payments surpluses or deficits, via changes in the central bank's reserve holdings. This system helps to maintain exchange rate stability and control inflation, but it can also be restrictive in terms of the country's monetary policy options.

The Exchange Rate Arrangement Whereby the Nation Fixes the Exchange