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. Which of the following best describes the effect on Aruba's money supply from purchasing dollars?
A) The money supply will increase.
B) The money supply will decrease.
C) The money supply will not change.
D) The money supply will not change as the exchange rate appreciates.

Question

Quizplus · Accepted Answer

When Aruba purchases dollars, it increases its foreign reserves, which leads to an increase in the domestic money supply as the central bank issues more local currency to buy the dollars.

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