An arrangement by which a central bank holds enough foreign currency to back each unit of the domestic currency is called a:
A) floating exchange rate.
B) dollarization.
C) monetization.
D) currency board.

Question

Quizplus · Accepted Answer

A currency board is an arrangement by which a central bank holds enough foreign currency reserves to back each unit of the domestic currency. This provides a fixed exchange rate between the two currencies. A floating exchange rate allows the exchange rate to be determined by the market forces of supply and demand, and dollarization refers to a country adopting a foreign currency (such as Ecuador using the US dollar). Monetization refers to the process of converting assets into money or legal tender.

An Arrangement by Which a Central Bank Holds Enough Foreign