Suppose the Government of South Island Has Fixed the Value

question 8

Multiple Choice

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.25 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or purchase Islandia, which causes the supply of international reserves to ________.

• A)raise; increase
• B)raise; decrease
• C)lower; decrease
• D)lower; increase

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Definitions:

Currency Exchange Rates

The rate at which one currency can be exchanged for another.

Exchange Rate

The value of one currency for the purpose of conversion to another, determining how much one currency is worth in terms of another.

U.S. Dollars

The official currency of the United States, represented by the symbol $.

Australian Dollars

The currency of Australia, often represented as AUD, which is the legal tender in Australia and its territories.