Question

Residents of a South American country are not allowed to convert their currency into other currencies. However, all foreign businesses with deposits in banks there may, at any time, convert all their currency into foreign currency and take it out of the country. The currency in this country is

Multiple Choice

• leading.

• nonconvertible.

• externally convertible.

• freely convertible.

• lagging.

Answer 1

The given scenario states that residents of the country are not allowed to convert their currency holdings into foreign currencies.

However, non residents are allowed to convert their domestic currency holdings into foreign currencies.

When a country allows non residents to freely convert their domestic currency holdings into foreign currencies but restrict such activity for residents then currency of such country is said to be externally convertible.

Hence, the correct answer is the option (3) [Externally Convertible].