(Figure: Central Bank Balance Sheet) All points on the floating line are so named because:
A) at every point on the line, the supply of money is equal to bond holdings so that reserves are equal to zero.
B) at every point above the line, the exchange rate floats.
C) at every point below the line, the exchange rate is backed 100% by reserves.
D) exchange rates can only float if the economy is "on" the floating line.

Question

(Figure: Central Bank Balance Sheet) All points on the floating line are so named because: 
A) at every point on the line, the supply of money is equal to bond holdings so that reserves are equal to zero. 
B) at every point above the line, the exchange rate floats. 
C) at every point below the line, the exchange rate is backed 100% by reserves. 
D) exchange rates can only float if the economy is "on" the floating line.

Quizplus · Accepted Answer

The floating line represents the point where the central bank's balance sheet is balanced, meaning that the supply of money is equal to bond holdings, resulting in zero reserves. This is why it is called the floating line, as any point above or below it indicates either a surplus or a deficit of reserves, respectively. The line does not indicate anything about exchange rates, as they can float regardless of the position of the economy on the balance sheet.

(Figure: Central Bank Balance Sheet) All Points on the Floating