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    Question

    Which policy determines the free conversion of

    domestic currency with international currencies?   
    A Financial Budgetary Management Correct Answer Incorrect Answer
    B Currency Conversion Factor Correct Answer Incorrect Answer
    C Capital account convertibility Correct Answer Incorrect Answer
    D Foreign Exchange Management Correct Answer Incorrect Answer
    E Liquidity Adjustment Facility Correct Answer Incorrect Answer

    Solution

    Capital account convertibility (CAC) means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This implies that Capital Account Convertibility allows anyone to freely move from local currency into foreign currency and back. Current account convertibility allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans.

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