When a country adopts a currency board, its central bank: Question 18 options: k

Question

When a country adopts a currency board, its central bank:

Question 18 options:

keeps the exchange rate fixed to another currency.

holds enough foreign reserve to back every unit of domestic currency.

both keeps the exchange rate fixed to another currency AND holds enough foreign reserve to back every unit of domestic currency.

increases its ability to implement monetary policy.

keeps the exchange rate fixed to another currency.

holds enough foreign reserve to back every unit of domestic currency.

both keeps the exchange rate fixed to another currency AND holds enough foreign reserve to back every unit of domestic currency.

increases its ability to implement monetary policy.

Explanation / Answer

Answer : The correct option is a.

Because in case of currency board, the exchange rate is fixed to maintain the currency behaviour like inflation in domestic country. This means that in case of currency board adoption for a country the exchange rate is kept fixed by the central bank of that country.

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