A ratio indicating how safe the peg is from breaking is calculated by _______ and is called ________.
A) foreign reserves as a percent of GDP; the safety margin
B) foreign reserves as a percent of the total money supply; the backing ratio
C) money demand as a percent of money supply; the financial adequacy quotient
D) foreign reserves as a percent of domestic credit; the marginal propensity to break

Question

Quizplus · Accepted Answer

The ratio indicating the safety of the peg from breaking would be calculated by dividing foreign reserves by the total money supply and is therefore known as the backing ratio. Option A is incorrect because it compares foreign reserves to the GDP which is a measure of the size of the economy and not relevant to peg safety. Option C is incorrect because it compares money demand to money supply which is not relevant to peg safety. Option D is incorrect because it refers to the marginal propensity to break which is not a commonly used term in this context.

A Ratio Indicating How Safe the Peg Is from Breaking