When maintaining a peg, if the central bank runs out of foreign currency reserves, then:
A) it can always print more of the domestic currency.
B) it can back the money supply by purchasing domestic assets.
C) it can sell its own currency and purchase foreign currency reserves.
D) it must allow the domestic currency to float.

Question

Quizplus · Accepted Answer

If a central bank runs out of foreign currency reserves, it cannot maintain the peg and must allow the domestic currency to float, as it cannot intervene in the foreign exchange market to support the peg.

When Maintaining a Peg, If the Central Bank Runs Out