To maintain the peg, a nation must keep its money supply constant, which it does by:
A) buying and selling foreign reserves and domestic assets for its own currency.
B) requiring all banks to back deposits 100%.
C) backing the currency by foreign reserves 100%.
D) selling only foreign reserves for its own currency.

Question

Quizplus · Accepted Answer

To maintain a peg, a nation must keep its money supply constant, which it does by buying and selling foreign reserves and domestic assets for its own currency. This allows the central bank to control the supply and demand of its currency and stabilizes its value in relation to the pegged currency. Requiring all banks to back deposits 100% and backing the currency by foreign reserves 100% are not effective methods for maintaining a peg. Selling only foreign reserves for its own currency may not be enough to maintain the peg as it ignores the domestic money supply.

To Maintain the Peg, a Nation Must Keep Its Money