To Counteract the Depreciation of the National Currency Against the U.S

question 45

Multiple Choice

To counteract the depreciation of the national currency against the U.S. dollar, the central bank of a country can intervene in the foreign exchange market. Which of the following imposes a restriction on this ability of the central banks to maintain a fixed exchange rate?

• A) The central banks have a limited amount of international reserve.
• B) The central banks have a limited amount of domestic currency.
• C) Unrestricted sale of foreign currency will cause inflation in the domestic economy.
• D) The supply of dollars is perfectly elastic in the foreign exchange market.
• E) The central banks need to maintain a certain amount of its assets in the form of gold.

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