________ is when the domestic currency is backed 100% by a foreign currency and in which the note-issuing authority establishes a fixed exchange rate to this foreign currency and stands ready to exchange domestic currency for the foreign currency at this rate whenever the public requests it.

Question

Quizplus · Accepted Answer

A currency board is a system where the domestic currency is backed by a foreign currency, usually the US dollar or the euro. The note-issuing authority establishes a fixed exchange rate between the domestic and foreign currency, and holds enough foreign currency in reserve to back the entire domestic money supply. This means that the domestic currency is freely convertible into the foreign currency at the fixed exchange rate, and the note-issuing authority stands ready to exchange domestic currency for the foreign currency whenever the public requests it. This system provides a high degree of monetary stability and credibility, as well as low inflation rates, as the money supply is limited by the amount of foreign currency reserves held by the currency board.

________ Is When the Domestic Currency Is Backed 100% by a Foreign