The Ideal Currency Regime and Its Properties

An investor wants to purchase assets in another country. The investor, however, is unable to acquire that country’s currency to complete the transaction. Which of the following _best describes_ the features of the ideal exchange rate regime that this violates?

Incorrect. Credibly fixed exchange rates are one property of the ideal currency regime. A fully flexible exchange rate moves up and down according to market forces, however, and thus is not part of the ideal currency regime.

Correct! Fully convertible currencies allow investors and consumers to freely purchase assets and goods/services in other countries. In this example, an investor is unable to purchase an asset because of the inability to convert between two particular currencies.

Incorrect. Indeed, this is one property of the ideal exchange rate regime. Whether or not the investor can exchange for this currency, however, does not affect the central bank's ability to maintain a fixed exchange rate.

Fully convertible currencies

Fully flexible exchange rates

Credibly fixed exchange rates