To have adequate protection to cover a depreciation, the central bank must keep its foreign currency reserves at the level at which:
A) they are growing at the same rate as GDP.
B) they are equal to the demand for money minus the amount of domestic credit (held by the central bank).
C) they are greater than zero.
D) they are worth three months of import protection.

Question

Quizplus · Accepted Answer

Keeping foreign currency reserves at the level equal to the demand for money minus the amount of domestic credit held by the central bank provides adequate protection to cover a depreciation of the domestic currency. This is because it ensures that the central bank has enough foreign currency to intervene in the foreign exchange market and prevent a sudden devaluation of the domestic currency. Options A, C, and D do not provide a specific or accurate level of foreign currency reserves needed for depreciation protection.

To Have Adequate Protection to Cover a Depreciation, the Central