Aruba pegs its currency (the Aruban florin) to the U.S. dollar at a rate of Af 2 = $US1. Suppose that the actual exchange rate is equal to this pegged rate. Now suppose that the Aruban central bank buys dollars. Which of the following describes the effect of this dollar purchase on Aruba's exchange rate?
A) upward pressure on the exchange rate (depreciation of florin)
B) downward pressure on the exchange rate (appreciation of florin)
C) no effect on the exchange rate
D) Not enough information is provided to answer.

Question

Quizplus · Accepted Answer

When the Aruban central bank buys dollars, it increases the demand for dollars, which puts upward pressure on the exchange rate, leading to a depreciation of the florin.

Aruba Pegs Its Currency (The Aruban Florin) to the U