When the government is the sole depository of foreign currencies and exercises complete control over how these currencies may be used, this
A) is a violation of International Monetary Fund regulations for member countries because it denies the right of market forces to determine exchange rates
B) creates equilibrium in the foreign exchange market which would otherwise not occur
C) is an example of exchange controls that allow a government to maintain a fixed exchange rate
D) is necessary in a floating exchange rate system to keep the market in equilibrium
E) stimulates international trade because it eliminates all the uncertainty associated with floating exchange rates

Question

Quizplus · Accepted Answer

Exchange controls are measures taken by a government to regulate the foreign exchange market. By being the sole depository of foreign currencies and controlling their use, a government can maintain a fixed exchange rate by limiting the availability of foreign currency, thereby influencing the exchange rate directly. This does not necessarily align with the principles of a floating exchange rate system, where the market forces of supply and demand determine the exchange rate, nor does it inherently create market equilibrium or stimulate international trade due to the restrictions it imposes.

When the Government Is the Sole Depository of Foreign Currencies