When a country adopts a currency board system:
A) it no longer needs to hold any reserves.
B) its reserves equal 100% of its money supply.
C) it can create money by lending to domestic borrowers.
D) its reserves must equal 50% of its money supply.

Question

Quizplus · Accepted Answer

In a currency board system, the central bank sets a fixed exchange rate between its currency and a reserve currency, and promises to exchange its currency with the reserve currency at the fixed rate on demand. To maintain this exchange rate, the central bank must hold reserves of the reserve currency equal to 100% of the money supply in its own currency. Therefore, choice B is the correct answer.

When a Country Adopts a Currency Board System