Under a currency board,a nation's central bank
A) raises or lowers interest rates to keep the exchange rate fixed
B) consults with the central banks of other nations to agree upon monetary policy
C) operates according to a strict policy rule regarding money supply growth
D) uses exchange rates as an intermediate policy target and the inter-bank lending rate as an ultimate target
E) serves as the lender of last resort for the banking system

Question

Quizplus · Accepted Answer

Under a currency board, the central bank operates according to a strict policy rule regarding money supply growth, which typically involves holding reserves equal to the amount of currency in circulation. This ensures that the exchange rate remains fixed and provides credibility to the country's monetary policy. The central bank cannot change the amount of money in circulation, so it cannot manipulate interest rates or serve as lender of last resort. It also cannot consult with other central banks to agree upon monetary policy, as it is committed to maintaining the exchange rate at a fixed level.

Under a Currency Board,a Nation's Central Bank