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. Suppose that Aruba's money supply is Af 20 billion and Aruba's central bank holds $5 billion of dollar reserves and Af 10 billion of domestic bonds. What will happen to Aruba's backing ratio if its central bank sells $2.5 billion of U.S. dollars to Aruban citizens?
A) It will not change.
B) It will fall to 33%.
C) It will fall to 2.6%.
D) It will fall to 81%.

Question

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The Answer of 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. Suppose that Aruba's money supply is Af 20 billion and Aruba's central bank holds $5 billion of dollar reserves and Af 10 billion of domestic bonds. What will happen to Aruba's backing ratio if its central bank sells $2.5 billion of U.S. dollars to Aruban citizens?
A) It will not change.
B) It will fall to 33%.
C) It will fall to 2.6%.
D) It will fall to 81%.

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