Question

Which of the following statements are true? Which are false? Explain (for each statement) If investors...

Which of the following statements are true? Which are false? Explain (for each statement)

  1. If investors expect the currency to appreciate in the future and demand the currency today, the central bank may run out of reserves while trying to prevent currency from appreciating.

  2. Unlike money supply targeting, the crawling peg policy uses the exchange rate as a nominal anchor.

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Answer #1

1) FALSE

The given statement is not true as the central bank does not spend all the reserves and takes the help of various other policies as well while controlling the situation. There are some minimum limit of reserves that need to be maintained by the central bank and thus, it will not be totally out of reserves while controlling for appreciation.

2) TRUE

A crawling peg system is a system of exchange rate adjustment in which a currency with a fixed exchange rate system is allowed to float within a band of rates. Unlike money supply targeting, crawling peg thus uses exchange rates as a nominal anchor.

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