Aruba Pegs Its Currency (The Aruban Florin) to the U

question 94

Multiple Choice

Aruba pegs its currency (the Aruban florin) to the U.S. dollar at a rate of Af 2 = $US1. Suppose that the actual exchange rate is equal to this pegged rate. Suppose that Aruba's money supply is Af 20 billion and Aruba's central bank holds $5 billion of dollar reserves and Af 10 billion of domestic bonds. What will happen to Aruba's backing ratio if its central bank sells $2.5 billion of U.S. dollars to Aruban citizens?

• A) It will not change.
• B) It will fall to 33%.
• C) It will fall to 2.6%.
• D) It will fall to 81%.

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Definitions:

Domestic Supply Curves

Graphical representations showing the relationship between the price of a good and the quantity supplied by domestic producers.

Domestic Demand Curves

Graphs showing the quantity of a good that consumers in a domestic market are willing and able to purchase at various prices.

Import Demand Curves

Charts representing the volumes of a product that an economy is ready to import at various price points.

Export Supply Curves

A graphical representation showing the relationship between the quantity of a good that producers are willing to export and the price of the good in the international market.