A currency board is a monetary system that requires the domestic currency to be 100% backed by foreign reserves or gold. This means that the currency board cannot print money to finance budget deficits or intervene in foreign exchange markets beyond the amount of foreign reserves it holds. Therefore, option C is the correct choice.

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A Currency Board

Question 45

Multiple Choice

A currency board

A) regulates how much a central bank can intervene in foreign exchange rate markets
B) controls how much money the central bank can print to finance large budget deficits
C) provides 100% backing for the domestic currency in foreign reserves or gold
D) allows for more discretionary monetary policy than target zones
E) has to be established when the domestic currency is replaced with a stable, generally accepted currency such as the U.S. dollar or the Euro

Correct Answer: