Adoption of a currency board

Question

Quizplus · Accepted Answer

Adoption of a currency board requires a centralized institution to hold interest-bearing assets denominated in the currency against which the nominal exchange rate is being fixed. This ensures that the domestic money supply is fully backed by foreign reserves, which helps to maintain the fixed exchange rate. Option A is incorrect because a currency board is a hard peg policy, not a soft peg policy. Option C is incorrect because the seigniorage revenue is typically used to cover the operating costs of the currency board, and any surplus is usually used to build up reserves. Option D is incorrect because a currency board does not mandate the use of the currency in all domestic transactions. Option E is partly correct, but it oversimplifies the issue. While currency boards are typically designed to be independent of political influences, they still operate under the legal framework established by the government, and they may be subject to political pressure or interference.

Adoption of a Currency Board