Under a currency board,the central bank holds __________,so that the domestic currency is __________ by the foreign exchange.

Question

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Under a currency board, the central bank holds foreign exchange reserves, usually in the form of highly liquid assets such as government bonds denominated in foreign currency, to fully back the domestic currency. This means that the value of the domestic currency is directly tied to the value of the foreign currency, serving as a credible commitment device for maintaining monetary stability. Holding gold (choice A) is a feature of a gold standard, which is a different type of monetary regime. Domestic bonds (choice C) do not provide the necessary backing for a currency board, as they are not as widely accepted and liquid as foreign exchange reserves. Holding both foreign exchange reserves and domestic bonds (choice D) is possible, but foreign exchange reserves are the primary form of backing for the currency board.

Under a Currency Board,the Central Bank Holds __________,So That the Domestic