A country cannot maintain currency convertibility if:
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A. B. C. D.D
A country can either follow an independent monetary policy and allow its exchange rate to fluctuate or tie its monetary policy to the maintenance of the fixed exchange rate.
The correct answer to the question is C. It fixes the exchange rate value of its currency and has a dependent monetary policy.
Currency convertibility refers to the ability to freely convert a country's currency into another currency without any restrictions or limitations. It allows individuals, businesses, and governments to exchange one currency for another in international transactions. Currency convertibility is an important aspect of a country's economic and financial system, as it facilitates international trade and investment.
Option A, "none of these answers," is incorrect because there are specific conditions under which a country may not maintain currency convertibility, which are outlined in the other answer choices.
Option B, "it allows the exchange rate value of its currency to fluctuate and follows an independent monetary policy," does not affect currency convertibility. In this scenario, the country's currency is free-floating, and its value is determined by market forces such as supply and demand. The country can still maintain currency convertibility as long as there are no restrictions on exchanging the currency.
Option C, "it fixes the exchange rate value of its currency and has a dependent monetary policy," is the correct answer. When a country fixes the exchange rate value of its currency, it means that the exchange rate is set at a specific level in relation to another currency or a basket of currencies. The fixed exchange rate can be maintained through various mechanisms, such as direct intervention by the central bank or pegging the currency to a foreign currency.
In this scenario, if the country also has a dependent monetary policy, it means that it does not have control over its domestic monetary policy decisions. It may have to align its monetary policy with that of the country or countries to which its currency is pegged. This lack of independence in monetary policy restricts the country's ability to adjust interest rates, money supply, and other monetary tools according to its domestic economic conditions. As a result, it becomes challenging to maintain currency convertibility because the country cannot respond effectively to external economic shocks or imbalances.
Option D, "it fixes the exchange rate value of its currency and follows an independent monetary policy," is not the correct answer. If a country fixes its exchange rate value and follows an independent monetary policy, it can still maintain currency convertibility. The fixed exchange rate system may require occasional interventions by the central bank to ensure the exchange rate remains within the desired range, but it does not necessarily hinder currency convertibility.
In summary, a country cannot maintain currency convertibility if it fixes the exchange rate value of its currency and has a dependent monetary policy (option C).