Propping Up the Argentinian Peso

Answer the following questions to check your understanding of the story.

What is happening to the peso as it approaches the upper limit of its flexible exchange rate band?

a) The peso is appreciating.

b) The U.S. dollar is depreciating.

c) The peso is neither depreciating nor appreciating as long as it stays inside the band.

d) The peso is depreciating.

Why is Argentina's central bank using its scarce reserves to support the peso?

a) To keep the real exchange rate constant

b) To increase economic growth by encouraging foreign investment in Argentina

c) To achieve a target inflation rate

d) To increase net exports and decrease aggregate demand

Why is Argentina’s central bank likely to replace the band with a more flexible exchange rate system?

Argentina’s central bank is _____________, which it can’t do indefinitely.

a) piling up U.S. dollar reserves only

b) depleting its peso reserves and piling up U.S. dollar reserves

c) depleting its U.S. dollar reserves

d) depleting its peso reserves only

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