Read the excerpt: 'The Jordanian Dinar (JOD) has maintained an official fixed peg to the United States Dollar at a rate of approximately 1 JOD to 1.41 USD (or 0.709 JOD per USD) since 1995. Managed by the Central Bank of Jordan, this monetary peg serves as a vital anchor for macroeconomic stability, containing inflation and reinforcing investor confidence, albeit requiring the central bank to maintain substantial foreign exchange reserves and shadow US Federal Reserve interest rate decisions.'
What trade-off is required of the Central Bank of Jordan to maintain the currency peg to the US Dollar?

Answer and explanation

Correct answer: B. It must hold substantial foreign exchange reserves and closely track US Federal Reserve interest rate policies

  1. Step 1: Locate trade-off mechanism in text: 'requiring the central bank to maintain substantial foreign exchange reserves and shadow US Federal Reserve interest rate decisions'.
  2. Step 2: Apply macroeconomic principle (Mundell-Fleming Trilemma): A fixed exchange rate with open capital markets forfeits independent monetary policy; interest rates must shadow the anchor currency.
  3. Step 3: Select the exact corresponding choice.
Answer
It must hold substantial foreign exchange reserves and closely track US Federal Reserve interest rate policies.
Why not the others: 'Prohibiting commercial banking', 'Printing unbacked notes causing hyperinflation', and 'Abandoning regulatory oversight' are incorrect statements contradicted by central banking stability.

Practise more Academic Reading Comprehension.

Free questions with an explanation for every one, and full timed University of Jordan English Proficiency Test (JU-EPT) mock tests.

All Academic Reading Comprehension questionsTake a mock test

More Academic Reading Comprehension questions