Question

True or false and explain please.

1.Like gold standard, the currency board (foreign exchange rate policy) is doomed to fail.

2.For euro to become a world currency, it is necessary that the eurozone countries run long-term trade deficits.

3.For a country with deficit in current account, devaluation of domestic currency will help reduce the deficit immediately.

4.In a nation which pegs its currency to the U.S. dollar at fixed exchange rates, it is very likely that the central bank must purchase dollars with its domestic currency when facing large trade surplus.

Answer 1

1. The given statement is FALSE because unlike gold standard, the currency board is bound to fail and it is expected to carry the exchange rate regime for a longer period of time.

2. Given statement is FALSE because eurozone countries need not run long term trade deficit in order for Euro to become a world currency

3.given statement is correct because the devaluation in its current account domestic currency would be helpful in generation of foreign exchange and it will be leading to reduction of the overall deficit.

Given statement is TRUE.

4.the given statement is TRUE because when the central bank will buy its own currency, it will be balancing the trade surplus against US dollars.