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 what will happen to Aruba's exchange rate?
A) The exchange rate will appreciate.
B) The exchange rate will depreciate.
C) The exchange rate will not change.
D) Not enough information is provided to answer.

Question

Quizplus · Accepted Answer

If the central bank buys dollars, it will increase the supply of dollars on the foreign exchange market, causing the value of the Aruban florin to depreciate relative to the U.S. dollar. Therefore, the exchange rate will depreciate.

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