Suppose That Econland Has a Fixed Exchange-Rate System

question 207

Multiple Choice

Suppose that Econland has a fixed exchange-rate system. Econland’s government (its central bank) will exchange as much local currency (say pesos) for foreign currency (say dollars) and as much foreign currency (say dollars) for local currency (say pesos) as is necessary to maintain the peg. Which of the following statements is not true?

• A) Satisfying requests by people to get local pesos in exchange for foreign dollars is easy for the central bank to do.
• B) The central bank has a restricted capacity to satisfy requests by people to get foreign dollars in exchange for local pesos.
• C) Being the central bank, it has an equal capacity to satisfy requests to exchange dollars for pesos, and pesos for dollars.
• D) The central bank needs to stockpile some foreign-exchange reserves in order to maintain the peg.

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Definitions:

World Bank

An international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing capital projects.

MIGA

The Multilateral Investment Guarantee Agency, part of the World Bank Group, that offers political risk insurance to companies investing in developing countries.

Dumping

The practice of a company selling a product in a foreign market at a price lower than its market cost or below the production cost, often to increase market share or drive out competition.

Multilateral Investment Guarantee Agency

An international financial institution that offers political risk insurance and credit enhancement to investors and lenders to encourage investment in developing countries.