An example in the text of Argentina's convertibility plan during 1993-94 indicated that because of a growing economy, the central bank expanded the supply of money to maintain its U.S. dollar peg by:
A) acquiring foreign reserves.
B) buying domestic bonds.
C) issuing new government liabilities.
D) selling gold.

Question

Quizplus · Accepted Answer

The most effective way for a central bank to maintain a fixed exchange rate is by acquiring foreign reserves. This means buying U.S. dollars (in the case of Argentina's convertibility plan) and holding them as a reserve to defend the exchange rate if necessary. Buying domestic bonds or issuing new government liabilities would increase the domestic money supply and potentially lead to inflation, which would undermine the exchange rate peg. Selling gold is generally not a preferred option for a central bank, as it reduces its overall reserve holdings and may not be as liquid as foreign currencies.

An Example in the Text of Argentina's Convertibility Plan During